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The Federal Reserve System

The Federal Reserve System. SSEMA2 The student will explain the role and functions of the Federal Reserve System. Overview.

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The Federal Reserve System

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  1. The Federal Reserve System SSEMA2 The student will explain the role and functions of the Federal Reserve System.

  2. Overview • The student will explain the Federal Reserve System’s organizational structure including the Board of Governors, district banks, and the Federal Open Market Committee (FOMC).

  3. The Federal Reserve System • The Federal Reserve System is the United States’ decentralized, central bank. • It is both public and private in nature. • It was created in 1913 to help instill trust in the country’s banking system. • Since the Federal Reserve can act as the “lender of last resort” to help struggling banks meet their depositor’s demand for money, people are less likely to fear bank failure.

  4. Congress • It was created by an act of Congress, so it can be dissolved by an act of Congress. • In this way, the Federal Reserve is checked by those elected by the people.

  5. Board of Governors and FOMC • The seven members of the Board of Governors of the Federal Reserve System are nominated by the President and confirmed by the Senate. • They are the public part of the Federal Open Market Committee that makes monetary policy decisions. • A full term is fourteen years. • One term begins every two years, on February 1 of even-numbered years. • The Chairman and the Vice Chairman of the Board are named by the President from among the members and are confirmed by the Senate. • They serve a term of four years.

  6. U.S. Government • The Federal Reserve is the fiscal agent for the United States government.

  7. Federal Reserve Note • The United States paper currency is called a Federal Reserve Note because it is backed by the assets of the Federal Reserve mainly the government securities (bonds) it holds.

  8. Profits of the Fed • Profits earned by the Federal Reserve System are transferred to the United States government. • In 2011, the Federal Reserve transferred over $79 billion in profits to the U.S. Treasury.

  9. District Banks • The system is decentralized with 12 district banks serving the needs of different regions of the country.

  10. Board of Directors • The board of directors for each of the 12 district banks includes two-thirds of directors elected by the privately controlled member banks of that district as well as one third of the directors elected by the Board of Governors.

  11. Voting • There are five district bank presidents serving as voting members of the FOMC at any given time. • The New York Federal Reserve Bank President is always a voting member of the FOMC and four other district Federal Reserve Presidents serve as voting members on a rotating basis.

  12. Services of the District Banks • Each district Federal Reserve Bank is organized as a private corporation and it self-financed through interest earned on securities held or payments for services like check-clearing.

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