U.S. ECONOMY > State & Federal Finance > Federal Departments and Regulatory Agencies > Federal Reserve System: Structure and Functions

Federal Reserve System: Structure and Functions

The Board of Governors

The Board of Governors, located in Washington, D.C., is a federal government agency. It consists of seven members appointed by the president and confirmed by the Senate for staggered 14-year terms. The chairman and vice chairman are designated by the president, with Senate approval, for four-year terms (renewable during their Board-member terms).

The Board of Governors regularly reports to Congress, giving an annual report on operations and semiannual reports on the state of the economy and the Fed's objectives for the growth of money and credit. The chairman meets regularly with the president and the secretary of the Treasury. Board members testify frequently before congressional committees and meet frequently with the president's Council of Economic Advisers and other key economic officials.

Board members participate in formulating monetary policy, along with Reserve Bank presidents, through the Federal Open Market Committee. The Board has sole responsibility for setting reserve requirements for depository institutions and approves discount rate changes proposed by Reserve Bank directors.

The Board establishes and administers financial safety and soundness and consumer protection regulations and administers regulations regarding bank consolidation. The Board also oversees Reserve Banks' services to depository institutions, bank supervision functions, and accounting procedures and approves Reserve Banks' budgets.

Federal Reserve Banks

Federal Reserve Banks are the decentralized element of the U.S. central bank. There are 12 Reserve Banks, located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. Branches are located in 25 other cities, and all but two Reserve Banks have at least one branch.

Each Federal Reserve Bank is separately incorporated, with a board of nine directors. Reserve Banks generate their own income, which comes mainly from interest on government securities acquired through open market operations. Each year, Reserve Banks turn over to the U.S. Treasury earnings in excess of the amount they need to pay expenses and dividends to member banks, to maintain a surplus equal to paid-in capital, and to pay operating expenses.

Reserve Bank directors, under Board of Governors supervision, oversee their bank's operations and appoint and recommend salaries of the bank's president and first vice president. Of the nine directors, six-three class A, representing the banking industry, and three class B-are elected by member banks, including all nationally chartered banks and state-chartered banks that meet certain requirements. Three class C directors, including the chairman and deputy chairman, are appointed by the Board of Governors. Class B and C directors represent agriculture, commerce, industry, labor, and services in the Federal Reserve District; they cannot be officers, directors, or employees of a bank, and class C directors cannot be bank stockholders.

Branch banks' boards have five or seven directors; the majority are appointed by head-office directors and the rest by the Board of Governors.

Reserve Banks monitor national and international economic conditions and provide information on their districts that is used in formulating monetary policy. Reserve Banks hold reserve balances for and serve as "lender of last resort" to depository institutions. Directors establish the discount rate charged on such loans, subject to approval by the Board of Governors.

Reserve Banks also examine and supervise certain types of depository institutions and provide payment services to depository institutions and the U.S. Treasury.

Federal Open Market Committee (FOMC)

The Federal Open Market Committee directs open market operations, the most important tool of monetary policy. The committee meets in Washington, D.C., eight times a year and holds additional meetings or telephone consultations as needed.

The FOMC comprises 12 members-the seven members of the Board of Governors and five Reserve Bank presidents, one of whom is the president of the Federal Reserve Bank of New York. Other presidents serve one-year terms on a rotating basis, and all presidents participate in each meeting.