Learning Objectives
- What is the structure of the Federal Reserve system?
The Federal Reserve is composed of twelve numbered
districts, each with its own Federal Reserve Bank: Boston (1),
New York (2), Philadelphia (3), Cleveland (4), Richmond (5),
Atlanta (6), Chicago (7), St. Louis (8), Minneapolis (9), Kansas
City (10), Dallas (11), and San Francisco (12). Except for regions
1 and 3, each of those district banks also
operates one or more branches. For example, the Federal Reserve
Bank of New York (FRBNY) maintains a branch in Buffalo; the Atlanta
Fed has branches in Nashville, Birmingham, New Orleans,
Jacksonville, and Miami. The Fed’s headquarters is located in
Washington, DC.For an interactive map of the system, browse
www.federalreserve.gov/otherfrb.htm.
Missouri is the only state with two federal reserve district
banks. This was thought necessary to secure the votes of Missouri
congressional representatives for the bill. (So much for public
interest!) The districts don’t seem to be evenly balanced
economically. They were, more or less, when the legislation
was passed before World War I, but since then, the West Coast,
Southwest, and Southeast (Sunbelt) have grown in economic
importance relative to the Northeast and old Midwest (Rustbelt).
(District 3 encompasses only southern New Jersey and eastern
Pennsylvania, an area that is no longer the economic powerhouse it
once was.) Rather than redistrict, the Fed has simply shifted
resources over the years toward the larger and economically more
potent districts.
Each Federal Reserve bank is owned (but not entirely
controlled) by the commercial banks in its district, and they are
members of the system. Those banks, which include all
nationally chartered banks and any state banks that choose to join,
own restrictedThe Fed’s stock is not traded in public markets and
pays an annual dividend no higher than 6 percent. shares in the
Fed, which they use to elect six district bank directors, three of
whom have to be professional bankers and three of whom have to be
nonbank business leaders. The Board of Governors in Washington
selects another three directors, who are supposed to represent the
public interest and are not allowed to work for or own stock in any
bank. The nine directors, with the consent of the board, then
appoint a president.
The twelve district banks do mostly grunt work:
- Issue new Federal Reserve notes (FRNs) in place of worn
currency
- Clear checks
- Lend to banks within their districts
- Act as a liaison between the Fed and the business
community
- Collect data on regional business and economic conditions
- Conduct monetary policy research
- Evaluate bank merger and new activities applications
- Examine bank holding companies and state-chartered member
banks.The Comptroller of the Currency is the primary regulator of
federally chartered banks. State regulators and the FDIC regulate
state banks that are not members of the Federal Reserve
system.
The FRBNY is the most important of the district banks
because, in addition to the tasks listed above, it also conducts
so-called open market operations, buying and selling government
bonds (and occasionally other assets) on behalf of the Federal
Reserve system and at the behest of headquarters in
Washington. Moreover, the FRBNY is a member of the Bank for
International Settlements (BIS) www.bis.org and safeguards over $100
billion in gold owned by the world’s major central banks. Finally,
the FRBNY’s president is the only permanent member of the Federal
Open Market Committee (FOMC).
The FOMC is composed of the seven members of the Board of
Governors, the president of the FRBNY, and the presidents of the
other district banks, though only four of the last-mentioned group
can vote (on a rotating basis). The FOMC meets every six weeks
or so to decide on monetary policy, specifically on the rate of
growth of the money supply or the federal funds target rate, an
important interest rate, both of which are controlled via so-called
open market operations. Until recently, the Fed had only two other
tools for implementing monetary policy, the discount rate at which
district banks lend directly to member banks and reserve
requirements. Prior to the crisis of 2007–2008, neither was an
effective tool for a long time, so the market and the media
naturally concentrated on the FOMC and have even taken to calling
it “the Fed,” although technically it is only one part of the
central bank. The head of the Fed is the Board of Governors,
which is composed of a chairperson, currently Ben Bernanke, and six
governors.
www.federalreserve.gov/aboutthefed/bios/board/bernanke.htm
All seven are appointed by the president of the United States and
confirmed by the U.S. Senate. The governors must come from
different Federal Reserve districts and serve a single
fourteen-year term. The chairperson is selected from among the
governors and serves a four-year, renewable term. The chairperson
is the most powerful member of the Fed because he or she controls
the board, which controls the FOMC, which controls the FRBNY’s open
market operations, which influences the money supply or a key
interest rate. The chairperson also effectively controls reserve
requirements and the discount rate. He (so far no women) is also
the Fed’s public face and its major liaison to the national
government. Although de jure power within the Fed is diffused by
the checks and balances discussed above, today de facto power is
concentrated in the chairperson. That allows the Fed to be
effective but ensures that a rogue chairperson cannot abuse his
power.
Historically, some chairpersons have made nebbishes look
effective, while others, including most recently Alan Greenspan,
have been considered, if not infallible demigods, then at least
erudite gurus. Neither extreme view is accurate because all
chairpersons have relied heavily on the advice and consent of the
other governors, the district banks’ presidents, and the Fed’s
research staff of economists, which is the world’s largest.
The researchers provide the chairperson and the entire FOMC with
new data, qualitative assessments of economic trends, and
quantitative output from the latest and greatest macroeconomic
models. They also examine the global economy and analyze the
foreign exchange market, on the lookout for possible shocks from
abroad. Fed economists also help the district banks to do their
jobs by investigating market and competition conditions and
engaging in educational and other public outreach programs.
KEY TAKEAWAYS
- The Fed is composed of a Washington-based headquarters and
twelve district banks and their branches.
- The district banks, which are owned by the member banks,
fulfill the Fed’s quotidian duties like clearing checks and
conducting economic research.
- The most important of the district banks is the Federal Reserve
Bank of New York (FRBNY), which conducts open market operations,
the buying and selling of bonds that influences the money supply
and interest rates.
- It also safeguards much of the world’s gold and has a permanent
seat on the Federal Open Market Committee (FOMC), the Fed’s most
important policymaking body.
- Composed of the Board of Governors and the presidents of the
district banks, the FOMC meets every six weeks or so to decide
whether monetary policy should be tightened (interest rates
increased), loosened (interest rates decreased), or
maintained.
- The Fed is full of checks and balances, but is clearly led by
the chairperson of the Board of Governors.
- The chairperson often personifies the Fed as he (to date it’s
been a male) is the bank’s public face.
- Nevertheless, a large number of people, from common
businesspeople to the Fed’s research economists, influence his
decisions through the data, opinions, and analysis they
present.