This article includes the US Central Banks‘ history and the road to nowadays situation and Federal Reserve System structure. As well as, you can find information about Fed working system and cooperation with other US institutions and finally demystify several myths you heard from people who do not know how Fed work. Find out what Federal Reserve System is?

Read, learn, be smart. Regards.

Federal Reserve System (Fed) is the central bank of United States of America. It was found in 1913 when Federal Reserve Act was signed. US Central bank is different in the way of economy manipulation comparing to European central banks (EU Central Bank, Bank of England and others).

In accordance to Federal reserve Act Federal Reserve each year must report about its doings to United States Congress house of representatives and twice per year to United States Senate Committee on Banking, Housing and Urban Affairs.

The history of US Central Bank: Federal Reserve System (Fed)

The first US Central Bank was First Bank of the United States (obvious) which was established in 1791 by Alexander Hamilton.

However, the bank’s mandate was not prolonged in 1811. And in 1816 the second US Central Bank which mandate was not prolonged in 1836.

During the period from 1836 till 1862 was so called “Free Banking” Era without any Central Bank but it showed this is not the best idea to leave financial system without a Central Bank. Therefore in 1863 several National Banks were found, however they also didn’t show good results (several crises) and in 1913 the new existing to the present day central bank was established – US Federal Reserve System which is the third Central Bank.

Nowadays, the Chairman of US Fed is Ben Bernanke.

Federal Reserve System (Fed) structure

Federal Reserve System (Fed) rests on four sub-bases: Board of governors, Federal Open Market Committee, Federal Reserve Banks and Member banks. Each has own function.

Board of Governors consists of 7 people (however now you will find five faces at Fed website) which are chosen by US president and the Senate for 14 years (for some of them it can be ad vitam term because people who are chosen are older than 40-50). These members are specialists in different areas – banking, agriculture and etc. As well as, all these members have to be from different Federal  Reserve Districts. The chairman and vice-chairman are chosen for 4 years.

Federal Open Market Committee (FOMC) consists of 12 people: 7 are from Board of Governors, 1 is the chairman of New York Federal reserve Bank and 4 are chosen from other Federal Reserve Banks. So Federal Reserve System is not an institution which is situated in one city in one building but consists of 12 Federal Reserve Banks.

In case of CFTC and SEC all meetings are opened to public but in case of Fed all meetings are held behind closed doors.

Federal Reserve Banks are under control of Board of Governors. This banks do not receive any funding, they get income providing services to credit institutions and from manipulations connected with monetary policy (of course these incomes are not the aim of banks). All profit is transfered to US Treasury.

Board of Directors consists of bank and public representatives: member banks are legal entities (commercial banks) which are Fed shareholders, they compose so called A class. Classes B and C consist of public representatives with due consideration to the interests of agriculture, commerce, industry, services, labor, and consumers. Board of Directors mostly do the inside work: give recommendation about monetary policy, appoint Federal reserve Bank chairmen and audit Fed Banks.

Federal Reserve System (Fed) functions

The main function of Fed is the monetary policy running. Board of governors and FOMC take the responsible to maintain this function. The system of how monetary policy in maintained in US by Fed differs from systems maintained by European Central Bank, you can find full information about monetary policy in US and the way it is maintained by Fed in article “Federal Reserve System (FED) Interest Rates“

The additional to the first function is economic data collection. This function is carried on by Federal Reserve Banks.

The third function is US government financing through buying T-bonds, T-notes and T-bills: US treasury issue bonds which are bought by the Fed.

And finally, the fourth function is US banking sector regulation and oversight. There is a large commercial bank report, as well as Fed holds Fedwire which is a Real Time Gross Settlement Funds Transfer system. 

US Federal Reserve System specifics and myths

The first myths is connected with Federal Reserve System specific: it belongs to private shareholders not government. In other countries Central Banks belong to government fully or partly. The myth is that Fed do what private shareholders want and therefore not what US economy really needs…FAULT. May be Fed sometimes is wrong but as previously told Fed is governed and is under the Congress and public representatives oversight.

Second difference is currency emission. If most of the central banks directly issue money and in this way throw money into the market and increase a money base, Fed works in a different way: Fed is not allowed to do some commercials business however we know that private investors exist and need profit. Therefore Fed increase the money base buying bonds from US Treasury. So there is always a number of bonds held by Fed.

More about Fed:

• Fed Education Center
• Fed website