What Is the Federal Reserve? Definition, Function and Who Owns It (2022)

When reading news on the current and potential future state of the U.S. economy, you're probably going to notice that the Federal Reserve comes up a lot.

Understanding the Federal Reserve, its purpose and its history over the past century will help you understand the current economy and economic system in this country. What is the Federal Reserve, what does it do and why was it established?

What Is the Federal Reserve?

The U.S. Federal Reserve, also known as theFed, is the central bank for the nation. The Fed also performs critical tasks in helping shape economic policy in the U.S., especially in establishing benchmark interest ratesthat banks, lenders, businesses, and individuals use to engage in commerce, and borrow and lend money. Most recently, the Fed made a decision to cut its benchmark lending rate by 50 basis points to counter the economic impact of the coronavirus outbreak.

The Federal Reserve was created in 1913 as part of the Federal Reserve Act, which was signed into law by President Woodrow Wilson.

What Does the Federal Reserve Do?

The Act has several key components and responsibilities that drive theFed forward, including:

Steering the U.S. economy

According to the Federal Reserve's web site, the Fed does so "by influencing money and credit conditions in the economy in pursuit of full employment and stable prices."

Providing Stability

The Fed is also tasked with injecting stability into the often unstable worlds of politics and commerce, and is especially focused on assessing potential economic risk in U.S. and global financial markets.

Regulating Banks

The Federal Reserve also regulates and oversees U.S. financial institutions (especially banks) to help provide clear, efficient and ethical channels between customers and the financial services industry. A high priority is protecting consumers from financial institutions that may try and take advantage of them.

Acting as the Government's Bank

The Federal Reserve also provides specific financial services to the federal government, and to U.S. and international financial institutions, while also steering the U.S. payments systems.

Why Was the Federal Reserve Created?

Before the Federal Reserve Act was signed into law in 1913, the U.S. had experienced a rash of financial crises and subsequent panic among the public worried over the safety of their bank and investment deposits. If one bank or lender collapsed, it would trigger a domino effect where other banks would fail, too, leading directly to the need by the federal government to have a steady hand at the wheel during a financial crisis. Upon its enactment, the Federal Reserve was immediately thrust into action in providing emergency loans to banks and financial institutions that needed them to stay afloat.

If there is a genesis or starting point for theFed, it may well have occurred in 1907 when an especially rough economic patch took many banks out of business, and sent many more to the precipice. Financial institutions lobbied politicians heavily to step in and offer some much-needed support, particularly in the form of a central bank, leading to the drafting of the 1913 Federal Reserve Act.

(Video) How The Federal Reserve Works (And Who Really Owns It)

Who Owns the Federal Reserve?

Nobody actually owns the Federal Reserve, just as nobody actually owns the U.S. Congress or the U.S. Department of Justice.

The Federal Reserve was created to serve the public interest, as its functioning Federal Reserve Board of Governors reports to and is accountable to Congress, which acts on behalf of the U.S. public.

To delve deeper into the ownership issue, it's worth taking a look at how the Federal Reserve is created - it shows an independent, public and private institution that's charter is to both help steer U.S. economic policy, provide financial services to the federal government, and to serve the interests of the American people.

Structurally, the Fed has three key pillars:

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  • A central governing board, also known as the Federal Reserve Board of Governors
  • A decentralized operating structure involving all 12 Federal Reserve Banks
  • A balance of public and private operating characteristics

Under this quasi-balanced approach, the Federal Reserve remains independent, and is not funded by Congress - its 12 separate Federal Reserve Bank are responsible for their own income, each with their own board of directors, and their own separately incorporated status.

Consequently, the Federal Reserve Banks do not operate with the goal of making a profit, relying on a system of interest earned on U.S. government securities it owns through everyday market transactions, and by stock owned by commercial banks to fund its operations. Any profits the Fed does earn are turned over to the U.S. Treasury, after paying for expenses incurred by the Fed in its day-to-to-day operations. The Fed also makes dividend payments to stock owners, and is allowed to have a moderate surplus fund on hand as part of its charter.

That all said, while the Federal Reserve isn't actually "owned" by anyone, the Fed is accountable to Congress and to the U.S. public, and regularly issues reports, statements, and notes on its operations, and on its view of the economy and on lending and credit conditions, to provide transparency.

Where are the 12 Federal Reserve Banks?

While the primary hub of the Federal Reserve is in the nation's capital - Washington, D.C., the Fed has 12 operating arms spread out in official districts across the U.S.

Each Federal Reserve Bank has the same charter - to provide services to financial institutions and the federal government, hold cash in reserve, provide loans and credit, and provide basic back-office functions like handling checks and managing currency movements, while acting as the fiscal agentfor Uncle Sam.

Each bank also oversees the health of banks and deposit institutions in its district, and helps the government establish and implement the nation's monetary policy.

To cover all that ground, there are 12 Federal Reserve Banks spread across the U.S., located in the 12 Federal Reserve Districts in the following cities and states: (data provided by the Richmond Federal Reserve.)

  • Federal Reserve Bank of Boston:- 1st District. Area covered: Connecticut (excluding Fairfield County), Massachusetts, Maine, New Hampshire, Rhode Island, and Vermont
  • Federal Reserve Bank of New York: (New York City) - 2nd District. Area covered: New York State, twelve counties in northern New Jersey, Fairfield County in Connecticut, Puerto Rico, and the Virgin Islands
  • Federal Bank of Philadelphia: - 3rd District. Area covered: Eastern Pennsylvania, southern New Jersey, and all of Delaware
  • Federal Reserve Bank of Cleveland: - 4th District. Area covered: Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.
  • Federal Reserve Bank of Richmond: (Richmond, Va.) - 5th District. Area covered: Maryland, Virginia, North Carolina, South Carolina, and most of West Virginia
  • Federal Reserve Bank of Atlanta: - 6th District. Area covered: Alabama, Florida, Georgia, and parts of Louisiana, Mississippi, and Tennessee
  • Federal Reserve Bank of Chicago: - 7th District. Area covered: Iowa and most of Illinois, Indiana, Michigan, and Wisconsin
  • Federal Reserve Bank of St. Louis:- 8th District. Area covered: Arkansas and portions of six other states: Missouri, Mississippi, Tennessee, Kentucky, Indiana, and Illinois.
  • Federal Reserve Bank of Minneapolis: - 9th District. Area covered: Minnesota, Montana, North Dakota, South Dakota, twenty-six counties in northwestern Wisconsin, and the Upper Peninsula of Michigan.
  • Federal Reserve Bank of Kansas City: (Kansas City, Mo.) - 10th District. Area covered: Kansas City. Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico, and Western Missouri.
  • Federal Reserve Bank of Dallas:- 11th District. Area covered: Texas, northern Louisiana, and southern New Mexico.
  • Federal Reserve Bank of San Francisco: - 12th District. Area covered: Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, Utah, and Washington, along with American Samoa, Guam, and the Northern Mariana Islands.

Pros and Cons of the Federal Reserve

Few mainstream financial observers would argue with the merit and need of a U.S. central bank - a role the Federal Reserve has played on a global stage for over 100 years.

(Video) Learn how the Federal Reserve works

That said, there are fair points to make on a "pro" and con basis with the Federal Reserve, especially on its unique role as both a financial services provider to the federal government, and its substantial role in shaping U.S. economic policy.

Let's look at both sides of the issue:

Pros of the Federal Reserve

  • Stability. The Federal Reserve can provide a calm, helpful hand to financial institutions and their depositors in times of severe economic strife.
  • United behind a single currency. Before the ascent of the Federal Reserve, the U.S had literally hundreds - even thousands - of currencies rolling through the economy. With its power granted by Congress and the executive branch, the Fed was instrumental in uniting the nation behind a single currency - the U.S. dollar.
  • It's a good risk containment system. The Federal Reserve regularly checks the nation's banks and financial institutions, running "stress tests" and reviewing financial statements to ensure that the public is dealing with institutions in good financial standing, and not overly-loaded with risk and liabilities.

Cons of the Federal Reserve

  • Limits on accountability. As a privately-owned central bank, the Federal Reserve, as an institution, has powers that exceed the powers of dutifully elected U.S. politicians, including the president and Congress.
  • Lack of true transparency. While the Federal Reserve does issue regular reports and its senior staff, including speeches and reports from the Fed chairperson and the 12 bank presidents, critics accuse the Fed of operating in secrecy, while Congress seems powerless to provide genuine oversight.
  • Its bailouts of big banks left a stain on the Fed that hasn't disappeared. In what many say was a big policy error by the Federal Reserve, the central bank issued bailouts to not only U.S. banking giants at significant risk, but to overseas banks, too. The bailouts amounted to trillions of dollars, and kept big banks - the real culprits of the near collapse of the nation's financial system in 2008 and the resulting "Great Recession" - out of harm's way while millions of Americans lost their jobs and their homes in the crisis.

Certainly, the Federal Reserve plays a powerful and needed role in measuring and actively steering the U.S. economy on a regular basis - a fact that isn't going to change anytime soon.

FAQs

What is the Federal Reserve and what is its function? ›

The Federal Reserve System, often referred to as the Federal Reserve or simply "the Fed," is the central bank of the United States. It was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system.

What is the Federal Reserve and who owns it? ›

The Federal Reserve System is not "owned" by anyone. The Federal Reserve was created in 1913 by the Federal Reserve Act to serve as the nation's central bank. The Board of Governors in Washington, D.C., is an agency of the federal government and reports to and is directly accountable to the Congress.

Who does the Federal Reserve answer to? ›

The Board of Governors, an agency of the federal government that reports to and is directly accountable to Congress, provides general guidance for the System and oversees the 12 Reserve Banks.

Who owns the Federal Reserve System quizlet? ›

The federal reserve system is owned and controlled by who? The federal reserve system is privately owned by the member banks themselves but is publically controlled by the federal government. seven governors are appointed by the president with senate approval for staggered 14 year terms.

What are the 3 main functions of the Federal Reserve? ›

The Federal Reserve acts as the U.S. central bank, and in that role performs three primary functions: maintaining an effective, reliable payment system; supervising and regulating bank operations; and establishing monetary policies.

What are the 3 main functions of the Federal Reserve Bank? ›

It includes three key entities: the Board of Governors, 12 Federal Reserve Banks, and the Federal Open Market Committee.
  • Overview of the Federal Reserve System. ...
  • The Three Key System Entities. ...
  • Conducting Monetary Policy. ...
  • Promoting Financial System Stability. ...
  • Supervising and Regulating Financial Institutions and Activities.
Jun 30, 2022

Is the Federal Reserve owned by the government? ›

Yes and no. The Federal Reserve (the Fed) enjoys a unique public/private structure that operates within the government, but is still relatively independent of government to isolate the Fed from day-to-day political pressures in fulfilling its varying roles.

Who owns the Reserve Bank? ›

The regional Federal Reserve Banks are largely owned by the hundreds of banks operating in each region, but by statute the Board of Governors in Washington has a majority of voting members on the Federal Open Market Committee, which decides US monetary policy.

Is the Federal Reserve independent? ›

The Fed is independent in the sense that monetary policy and related decisions are made autonomously and are not subject to approval by the federal government. However, its governors are appointed by the President and must be confirmed by Congress.

Who is in charge of Federal Reserve? ›

Jerome Powell

What was the Federal Reserve System quizlet? ›

Federal Reserve System. The country's central banking system, which is responsible for the nation's monetary policy by regulating the supply of money and interest rates.

Who created the Federal Reserve? ›

Introduction. The Federal Reserve System was established by Congress over a century ago to serve as the U.S. central bank. President Woodrow Wilson signed the Federal Reserve Act into law on December 23, 1913.

Why is it often said that the Fed is privately owned but publicly controlled? ›

The Fed is privately owned by its member banks, not by the government. The Fed is said to be publicly controlled because it is directed by a seven-member board of governors who are appointed by the president to govern the Fed in the public interest.

What are the main assets of the Federal Reserve banks? ›

U.S. Reserve Assets (Table 3.12)
Asset2019
1Total129,479
2Gold stock111,041
3Special drawing rights2 350,749
4Reserve position in International Monetary Fund2 526,153
2 more rows

What are the 5 functions of the Federal Reserve System? ›

The Federal Reserve performs five general functions—conducting the nation's monetary policy, regulating banking institutions, monitoring and protecting the credit rights of consumers, maintaining the stability of the financial system, and providing financial services to the U.S. government.

How does the Federal Reserve work for dummies? ›

What Does the Federal Reserve Do? - YouTube

What is the purpose of the Federal Reserve quizlet? ›

What is the purpose of the federal reserve? It works to strengthen and stabilize the nations monetary system. It provides financial services to the government, regulates financial institutions, maintains the payment system, enforces consumer protection laws, and conducts monetary policy.

Videos

1. THE FEDERAL RESERVE SYSTEM ORIGINS, PURPOSE & FUNCTION 1950s EDUCATIONAL FILM 44154
(PeriscopeFilm)
2. The Role of the Federal Reserve
(Vizo Financial)
3. Money creation in a fractional reserve system | Financial sector | AP Macroeconomics | Khan Academy
(Khan Academy)
4. The Federal Reserve Explained—[AP Macroeconomics Review]
(Heimler's History)
5. Fed Functions: Conducting Monetary Policy
(Federal Reserve)
6. The Federal Reserve and You - Chapter 3
(Philadelphia Fed)

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