The Federal Reserve System, commonly known as The Fed, is the central bank of the United States. It plays a crucial role not only in the U.S. economy but also in the global economy. But how does The Fed wield such influence? Let’s delve deeper into this powerful institution.
What is The Fed?
The Fed is the central bank of the United States, composed of three main entities: the Board of Governors, 12 regional central banks known as Federal Reserve Banks, and the Federal Open Market Committee (FOMC). Although it is the central bank of the U.S., The Fed is not entirely a government institution. The 12 Federal Reserve Banks, one of its primary entities, are owned by private banks.
The Fed was established in response to financial crises in the U.S. during the early 20th century. Following the financial panic of 1907, a group of people held a secret meeting at the Jeckyll Island Club in 1910 to discuss banking reforms. The discussions laid the foundation for the Federal Reserve System, which was officially established on December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law.
The Fed's main responsibilities include regulating interest rates and the availability of banking credit, setting national monetary policy, overseeing and regulating financial institutions, and providing financial services to the U.S. government and foreign official institutions.
The Fed’s Main Entities Structure
As the central bank controlling the U.S. economy, The Fed has a complex structure comprising three main entities:
The Board of Governors The Board of Governors is the highest entity within The Fed's structure. It is an independent central government agency. The U.S. President has the authority to appoint seven members to the Board of Governors, including the Chair and Vice Chair, who are then confirmed by the U.S. Senate. Board members serve 14-year terms, while the Chair and Vice Chair serve 4-year terms, with the possibility of reappointment. The Board of Governors' primary responsibility is to oversee the Federal Reserve System.
The 12 Federal Reserve Banks This entity consists of 12 regional banks that operate independently but under the supervision of the Board of Governors. Each bank is named after its headquarters' location, such as New York, Chicago, and San Francisco. These banks have a board of directors with nine members who oversee member banks, ensure liquidity within the financial system, provide key financial services, and enforce consumer protection laws.
The Federal Open Market Committee (FOMC) The FOMC is responsible for making key decisions regarding interest rates and other monetary policies. Its membership consists of seven members of the Board of Governors and five presidents of reserve banks, who collectively participate in discussions to shape monetary policy.
Why is The Fed So Powerful?
Despite one of its main entities being owned by private banks, The Fed has significant influence over the global economy. Three key factors contribute to The Fed's power:
Control Over the U.S. Economy The Fed is the institution that controls monetary policy in the U.S., the world’s largest economy. The Fed’s control over the U.S. economy gives it immense legitimacy and power. Even though the U.S. has experienced economic recessions, it remains the world’s largest economic power.
The Fed's Policies Affect Global Markets As the central bank of the U.S., The Fed’s policies often set the benchmark for central banks in other countries. Decisions like raising U.S. interest rates can attract global investors to deposit their funds in the U.S., which in turn affects international economies and markets.
The System Operated by The Fed The Fed operates a debt-based financial system, where it has full authority over money creation and regulating the currency supply. This power allows The Fed to control the U.S. economy and exert a significant impact on the global economy.
With full authority to set monetary policies, from interest rates to controlling the money supply, The Fed plays a critical role in maintaining economic stability not only in the U.S. but also globally.
