Monday, November 10, 2008

Structure of the Federal Reserve System

Structure of the Federal Reserve System

The Federal Reserve System is composed of three parts: (1) the Board of Governors (BOG), (2) the Federal Open Market Committee (FOMC), and (3) twelve regional Federal Reserve Banks

The Board of Governors sets policy for the Federal Reserve System. Its seven members are appointed by the President of the United States and confirmed by the Senate. The Federal Reserve governors are given 14-year terms to insulate them from political pressure. The terms are staggered so one term expires every two years. The chairman of the Board of Governors is the most important member of the Fed. The chairman oversees the Fed staff, presides over board meetings, reports regularly to congressional committees, and influences the direction of monetary policy. The President of the United States appoints the Fed chairman to a four-year term. It is not uncommon for a Fed chairman to serve many consecutive terms. For example, Alan Greenspan was originally appointed in 1987 by President Ronald Reagan, and later reappointed by Presidents George H.W. Bush, Bill Clinton, and George W. Bush.

The Federal Open Market Committee (FOMC) conducts open market operations to alter the money supply and influence the economy. Open market operations are the purchases and sales of U.S. government securities by the Federal Reserve System. The FOMC is composed of the seven members of the Board of Governors and five of the 12 regional bank presidents. The president of the New York Fed is always on the FOMC because the purchases and sales of government bonds are conducted at the New York Fed’s trading desk. The other four positions on the FOMC are rotated among the remaining 11 regional bank presidents. Open market operations are the Fed’s primary tool for conducting monetary policy and influencing the economy. The FOMC typically meets every six weeks in Washington, D.C. to discuss the condition of the economy and to consider changes in monetary policy.

The United States is divided into 12 Federal Reserve districts with one regional Federal Reserve Bank headquartered in each district. The 12 regional Federal Reserve Banks oversee the health of the banking system. They are headquartered in Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York, Philadelphia, Richmond, St. Louis, and San Francisco. The presidents of the regional banks are chosen from each bank’s board of directors, who are typically leaders of the region’s banking and business community.

The 12 regional Federal Reserve banks perform the following functions:
1. clear checks
2. issue new currency
3. withdraw damaged currency from circulation
4. evaluate some merger applications
5. administer and make discount loans to banks in their districts
6. act as liaisons between the business community and the Federal Reserve System
7. examine state member banks
8. collect data on local business conditions
9. use their large staffs of professional economists to research topics related to the conduct of monetary policy[7]

Figure 2. A map of the twelve Federal Reserve districts, their regional headquarters, and branch offices. Source: The Board of Governors of the Federal Reserve System (


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