What Is the Federal Reserve?
The main purpose of the Federal Reserve is to regulate monetary policy. The three goals that the Federal Reserve aims to achieve are maximum sustainable employment, stable prices, and moderate long-term interest rates. The majority of work the Federal Reserve performs is deciding long-term interest rates and working to achieve the goal of price stability. Price stability is a state in which prices do not change much over time and there is little inflation or deflation. Through monetary policy, the Federal Reserve seeks to ensure that the country attains optimal rates of employment and economic growth; it does this by influencing the interest rate, which in turn affects households' purchasing habits, which affects the production of goods and services (which increases employment to react to increase in production). The Federal Reserve is also in charge of overseeing and regulating banks to achieve maximum stability, encouraging consumer confidence in commercial banking. These were important needs during the early 1900s, a financially volatile time, and are still important today.Another central mission of the Federal Reserve is to function as a bank for depository institutions. A depository institution is a financial institution legally allowed to accept monetary deposits from customers. Banks, credit unions, and savings and loan associations are examples of financial institutions. Just as individuals' banks enable them to cash checks, the Federal Reserve performs a parallel function for the federal government and other large institutions. Most countries have national banking systems similar to the Federal Reserve, but these are most often simply called "central banks."
The Federal Reserve and Banking System
Structure of the Federal Reserve
The seven members of the Board of Governors each serve staggered, nonrenewable 14-year terms. This system of cycling positions within the Federal Reserve is designed to minimize any political influence; the Fed was created to be independent in setting monetary policy.
There are 12 Federal Reserve Banks in the Federal Reserve System. The member banks are in Richmond, Boston, Dallas, Cleveland, Kansas City, Minneapolis, St. Louis, New York, Philadelphia, Atlanta, Chicago, and San Francisco. The Federal Reserve oversees these banks.
The Federal Open Market Committee is made up of the seven members of the Board of Governors as well as five voting members from the regional Federal Reserve Banks. The five voting members serve on a rotating basis. Four of the committee seats rotate between bank presidents, but the New York Reserve Bank president always has a seat. The committee is in charge of determining the vision and direction of monetary policy, including interest rates.