What is the Federal Reserve Bank?

The Federal Reserve Bank is the central bank of the United States.

The Fed oversees the largest US banks, implements and adjusts monetary policy, and provides financial services to the US government. It also takes action to support a healthy and stable economy and financial system by regulating banks, protecting consumers, and managing inflation and employment. Members of the Federal Reserve Board are nominated by the US President and confirmed by the Senate. However, the Fed is designed to operate without political influence and make decisions based only on what is best for the long-term US economic outlook.

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The three key entities of the Federal Reserve System are the Federal Reserve Board of Governors, the Federal Reserve Banks, and the Federal Open Market Committee, or FOMC.

There are 12 Federal Reserve Banks which were established in 1913 based on the division of the United States into 12 geographic districts. U.S. commercial banks that are members of the Federal Reserve System elect six of their respective district’s reserve bank directors, and the board of governors appoints the remaining three directors. The mandate of each of the 12 Reserve Banks is to collect information and data on the business and financial needs of communities in its region so that this information can be incorporated into decisions made by the Board of Governors.

The Federal Reserve Board is the governing body of the Federal Reserve System. The Council is made up of seven members, called governors, who are appointed by the US President and confirmed by the Senate. The Board of Governors oversees the entire Federal Reserve system and promotes the goals of the Federal Reserve, including stable inflation rates, a healthy labor market, and a functioning and liquid financial system.

Finally, the FOMC defines US monetary policy as setting interest rate targets. The FOMC is made up of 12 voting members, including the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining 11 Reserve Bank presidents. These last four positions in the FOMC rotate among the presidents of the reserve banks on an annual basis.

The FOMC influences the stock market in two main ways. First, the FOMC sets a target range for the federal funds rate, which is the interest rate that banks charge when they lend money to each other overnight. This rate influences the prime rate – the interest rate that commercial banks charge corporate clients with the best credit. The prime rate serves as the basis for a wide range of other interest rates, including rates on financial products such as mortgages, credit cards and savings accounts.

The FOMC is also authorized to buy or sell assets to stimulate the economy and provide liquidity to the market. Generally, asset purchases and lower interest rates are seen as stimulating for the economy and bullish for the stock market. Higher interest rates and asset sales are bearish for stock prices.

Here are the 12 regional Federal Reserve banks:

  • Bank of Boston.
  • Bank of New York.
  • Bank of Philadelphia.
  • Bank of Cleveland.
  • Bank of Richmond.
  • Bank of Atlanta.
  • Bank of Chicago.
  • Bank of St. Louis.
  • Bank of Minneapolis.
  • Bank of Kansas City.
  • Bank of Dallas.
  • Bank of San Francisco.

The FOMC is the governing body of monetary policy for the Federal Reserve System. The FOMC holds eight meetings, approximately one every six weeks, throughout the year. The FOMC can also hold unscheduled meetings if necessary. In addition to the 12 voting members of the FOMC, all reserve bank presidents attend every FOMC meeting.

After each meeting, the FOMC issues a policy statement outlining the policy decisions made at the meeting and including a summary of the FOMC’s current economic outlook. In addition to the summary, the Chairman of the Federal Reserve holds a press briefing after each meeting to provide context for monetary policy decisions.

All regional Federal Reserve bank chairs make public appearances and comments, but the Chairman of the Federal Reserve Board is usually the public face of the Fed. In addition to holding press conferences after the FOMC meeting, the Fed chairman must report to Congress twice a year to provide updates on monetary policy decisions.

The Fed Chairman is nominated by the US President, confirmed by the Senate, and serves a four-year term. Fed chairs can be reappointed for additional four-year terms at the discretion of the US president. Jerome Powell is the current Chairman of the Federal Reserve Board. Here is a list of past Fed chairs with their tenure dates:

  • Charles Hamlin (1914-1916)
  • WPG Harding (1916-1922)
  • Daniel Crissinger (1923-1927)
  • Roy Young (1927-1930)
  • Eugene Meyer (1930-1933)
  • Eugene Black (1933-1934)
  • Marriner Eccles (1934-1948)
  • Thomas McCabe (1948-1951)
  • William McChesney Martin, Jr. (1951-1970)
  • Arthur Burns (1970-1978)
  • G. William Miller (1978-1979)
  • Paul Volker (1979-1987)
  • Alan Greenpan (1987-2006)
  • Ben Bernanke (2006-2014)
  • Janet Yellen (2014-2018)
  • Jerome Powell (2018–present)

Quantitative easing is the process by which a central bank buys long-term securities from its member banks. In the United States, these assets included mortgage-backed securities and US Treasury bills.

The purpose of quantitative easing is to provide liquidity to banks and stimulate lending to support the economy.

The Federal Reserve conducted four rounds of quantitative easing following the 2008 financial crisis. From November 2008 to October 2014, this quantitative easing increased the Fed’s balance sheet from less than $1 trillion to $4.4 trillion. billions of dollars.

The FOMC launched another round of aggressive quantitative easing in March 2020 in response to the pandemic. The latest wave of easing has increased the Fed’s balance sheet from around $4.2 trillion in February 2020 to nearly $9 trillion in March 2022.

Monetary policy decisions from the FOMC and comments from Federal Reserve bank presidents, especially the Federal Reserve Chairman, are often important catalysts for financial markets. Even subtle changes in the language of the FOMC policy statement from one meeting to the next can be enough to scare or reassure the market.

FOMC interest rate decisions can alter the cost of capital for companies that depend on debt to grow and even shift investor sentiment from growth stocks to value stocks or vice versa. The FOMC also works to reduce the risks of extreme economic downturns, such as the Great Depression.

  • Economic stability.The Federal Reserve helps stabilize the US economy, including consumer prices and the labor market. The Federal Reserve is also working to limit the severity and duration of economic downturns.
  • Bank supervision. The Federal Reserve monitors US banks, regularly testing their balance sheets and reviewing their financial statements to ensure they are not taking too much risk. In this sense, the Fed contributes to improving the transparency of the entire American financial system.
  • Monetary strength. The Federal Reserve system also helped unite the United States and ultimately the world behind the dollar as a reserve currency.

  • Responsibility. The Federal Reserve operates independently of the US government and its monetary policy decisions are not approved by Congress or the US President. This independence helps the Fed operate without political pressure, but it also limits the Fed’s accountability. Some Americans have criticized bailouts of banks and other financial institutions by the Federal Reserve, arguing that the security of federal bailouts encourages risky behavior by these companies.
  • Money income. The Federal Reserve controls the US money supply and has the power to buy assets and increase the money supply at will, which has ballooned the national debt and raised concerns about the long-term devaluation of the US dollar.

In 1790, the First Bank of the United States was established to be America’s first central bank and help the fledgling nation deal with Revolutionary War debt. After the war debt was largely repaid, Congress voted not to renew the charter of the First Bank of the United States and the bank ceased operations in 1811. The Second Bank of the United States operated from 1816 to 1836 before President Andrew Jackson refuses to renew its charter, arguing that such a powerful private financial institution would be difficult to control and prone to corruption.

A series of panics and bank runs in 1873, 1893, and 1907 prompted Congress to pass the Federal Reserve Act in 1913, which created the Federal Reserve system that remains in place today.

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