The United States Federal Reserve is a central banking system established by Congress in 1913 to provide an economic balance between unemployment and inflation. Woodrow Wilson gave the idea of the Federal Reserve in 1907 at the time of financial panic in the U.S.It was initially designed to look after the banks, commercial banking, effective communication, and transparency between banks.In intervals, Congress has increased the Federal Reserve’s power from being a central bank to managing the monetary policy of the U.S., inflation, employment rate, and stabilizing the U.S economy in times of crisis.The net worth of the U.S. Federal Reserve today is around $129,479, which consists of gold reserves, special drawing rights, and a reserve position in the International Monetary Fund.
The U.S. Federal Reserve founder rejected the idea of a single central bank. Instead of a single central bank, they provided a decentralized approach of 12 Reserve banks, a high command main governing body, and a public-private partnership.
As a public-private group, the main goal of the Federal Reserve is to serve the public interests, not only to fulfill the interest of a private partner.
The Federal Reserve System consists of three core groups, making it a whole system. They are as follows:
- Firstly, The Board of Governors.
- Then, a Group of 12 Federal Reserve Banks, and
- Followed by the Federal’s Open Market Committee, i.e., FOMC.
These three core groups help in making high-level decisions to boost the economy of the U.S. and stabilize the U.S finance market.
The Board of Governors
The Board of Governors has a vital role as a leader in the Federal Reserve System. Its headquarters is based in Washington, D.C. The Board of Governors is also called the Federal Reserve head as it is a crucial component of the Federal Reserve System of the U.S. It consists of the seven governors appointed by the President’s choice and confirmed by the Senate.
The work of the Board of Governors is to formulate monetary policy, examine domestic and international conditions of the finance market, and escort the committees formed to study the current scenario.
Federal Reserve Banks
Federal Reserve Bank is a group of 12 banks and 24 sub-branches under the supervision of the Board of governors. They serve in 12 different regions, and sub-branches do in the district.
The Federal Reserve Bank serves the banks, the public, and the U.S treasury. They act as ‘Banker’s Bank.’ They are the last resort for banks. Its main aim is to circulate money. Every Reserve Bank’s Board of directors looks after the management and activities of the District bank and they also contribute local community involvement, leadership and business experience.
Federal Open Market Committee
It is the Fed’s monetary policymaking body. Its work is to promote economic growth and stable prices. FOMC’s main aim is to oversee the money supply in the nation. They meet eight times a year in Washington, D.C. In the meeting, the committee discusses monetary policy and looks after the economic condition of the U.S. It is an amalgamation of the expertise of the Board of Governors and the 12 Reserve Banks of the Federal Reserve System.
The U.S. Federal Reserve plays a vital role in the U.S. economy and serves in banks’ financial inclusion. An essential function of the Federal Reserve is as follows:
- Formation of monetary policy: Forming monetary policy is an essential task of the Federal Reserve and Board of Governors. It helps the money supply in the economy and stabilizes the nation’s inflation rate and unemployment rate. By short-term and long-term monetary policy federal reserve they control the bank and its lending policy. The Federal Reserve adapts the expansionary monetary policy or contractionary monetary policy to maintain the interest rate in the economy.
- Promoting the nation’s financial stability: After the 2008 crisis, the Federal Reserve took the command in its hand and controlled the banks under it in both lending and interest rate. The Federal Reserve and the Board of Governors created the Large Institution Supervision Coordinating Committee (LISCC) to regulate the banks systematically. They check the inflow of capital and the discounting in the company’s commercial papers.
- Safeguarding the interest of financial institutions: Fed is a ‘Bankers bank.’ They promote the economic strengthening of the U.S. They handle the fluctuation in the economy with their long-term and short-term monetary policy. They act as a buffer for the U.S. treasury. It stores currency, coins, gold, and foreign currency as a buffer to support the economy during a national crisis. They hold federal funds as the reserve balance, which is kept with the sub-branches as a local Federal Reserve Bank.
- Efficient payment settlement system: Federal Reserve works as a payment settlement system. The core 12 Federal Reserves are interconnected for money flow in the bank. They maintain accounts of account holders, guide payment, fund managing, and reach the last person for financial inclusions. They promote interbank lending. They give an efficient way for banks to communicate with each other.
- Promoting consumer safety and serving the community: The Federal Reserve not only looks after the bank and nation’s monetary policy but also promotes the safety of the account holders. It also looks after the bank’s lending rate for the public to encourage financial inclusion in the last person. It also supports transparency between the bank and the public. It maintains the inflation rate for the economic growth of the nation.
Impact on the global level
The U.S. Federal Reserve plays an important role not only in the U.S but also has an impact on the global level. The Fed affects developing countries’ economies. Tools like expansionary monetary policy, contractionary monetary policy, quantitative easing, or tapering have directly affected their stock market, bond price, and mutual funds price. They indirectly affect the developing nation’s households and their world’s monetary policy.
Impact on the national level
The Fed’s direct impact is on the nation’s local level. It has impacted the life of citizens and the economic stability of the government. The interest rate has affected the purchasing power of the citizen. Also, it affects the level of taking loans for household or educational purposes.The Federal Reserve impacts the nation’s economic growth and banking system.
Who chooses the Governors?
Firstly, the President shortlists the name for the post, and then the list is sent to the Senate. After that, the Senate gives its confirmation to federal governors.
How many governors are chosen?
There are seven governors chosen on the Board by the Senate.
Where is the location of the Federal Reserve?
The main headquarters of the Federal Reserve is in Washington, D.C.
Who owns the Federal Reserve?
The Federal Reserve is a privately owned company that serves the U.S. government. It works on the philosophy of public-private partnership. However, it is privately owned but aims to support the people.
What is the importance of the Federal Reserve?