Understanding the Federal Reserve

Understanding the Federal Reserve is a video lesson series that uses lively graphics and straightforward examples to explain how the Fed impacts the economy. It introduces students to the origins and structure of the Fed, its three main functions, and how these functions help foster a stable financial system and a growing economy.

The Board of Governors

The Board of Governors is the governing body that oversees the Federal Reserve System, which is composed of 12 regional Reserve Banks. It also supervises the nation’s banking system and provides policy guidance to the President of the United States.

The seven members of the Board are appointed by the President and confirmed by the Senate. They serve staggered 14-year terms that expire in even-numbered years.

Term lengths are designed to keep the Board from being subjected to political pressure. By law, a member can be removed only by “cause.”

The board also includes a Chair and two Vice Chairs who serve four-year terms, which are usually renewed. The Chairman’s duties include serving as the Fed’s chief spokesperson. The other Vice Chairs have responsibilities in areas such as supervision, research and policy analysis. They also represent the Board on various advisory councils. These groups often meet with the Board four times a year as required by law.

The Federal Open Market Committee (FOMC)

The Federal Open Market Committee (FOMC) is the voting arm of the Board of Governors that makes decisions about monetary policy. This includes determining the federal funds rate, setting the discount rate and communicating with the public about the likely future course of monetary policy.

The FOMC reviews economic and financial conditions, determines the appropriate stance of monetary policy and assesses the risks to its long-run goals of price stability and sustainable economic growth. The Committee meets eight times a year in Washington, D.C.

The committee is comprised of twelve members, including seven board of governors and five Reserve Bank presidents. The board and New York Fed presidents have permanent voting positions, while the four regional bank presidents rotate on and off annually.

The Federal Reserve System

The Federal Reserve System, created by Congress in 1913, serves the public interest by influencing monetary and credit conditions to promote maximum employment, stable prices and moderate long-term interest rates. It also provides financial services to depository institutions, including banks and credit unions, and acts as a banker and fiscal agent for the United States government.

It also operates the nation’s payments system by distributing currency and coin, collecting checks, and electronically transferring funds between depository institutions. The Board of Governors, through its 12 regional Federal Reserve Banks and Branches, carries out these responsibilities in areas throughout the country.

The FOMC, made up of the Board’s seven governors, determines monetary policy by influencing the federal funds rate, the rate at which banks borrow reserves from each other. It also conducts open market operations to control the supply of bank reserves by purchasing and selling securities issued by the U.S. Treasury, Federal agencies and government-sponsored enterprises.

The Federal Reserve Balance Sheet

The balance sheet of the Federal Reserve is a detailed accounting of assets and liabilities. It serves the central bank’s goals of promoting employment, price stabilization, and a long-term but moderate interest rate.

The Fed’s balance sheet includes government-backed and mortgage-backed securities, which are purchased from the open market to increase the money supply and reduce credit shortages in the economy. This is known as quantitative easing, and it was a key component of the Great Recession recovery.

In May, the Federal Reserve announced plans to reduce its balance sheet by $8.5 trillion starting June 1, 2020. It will do this by not reinvesting the proceeds of around $30 billion generated from the maturity of treasury securities alongside $17.5 per month of agency mortgage-backed securities.