Federal Reserve Banks

The Federal Reserve Banks are the twelve regional central banks that comprise the US central bank system. Operating under the governance of the Federal Reserve Board in Washington, DC, the regional Federal Reserve Banks implement monetary policy, supervise and regulate member banks, operate the US payments system, and act as banker to the US government and other central banks.

Decentralized federal structure

The Federal Reserve was created in 1913 to serve as the central bank of the United States. Rather than concentrating central banking power in a single location, the Fed was deliberately designed as a decentralized system with twelve regional Federal Reserve Banks — Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.

This decentralized structure reflected Progressive Era concerns about banking power concentration. The regional structure also allowed the Fed to be responsive to regional economic conditions and to serve as a check on centralized federal power.

Monetary policy implementation

The Federal Reserve Board, headquartered in Washington, DC, and comprising seven governors appointed by the President and confirmed by the Senate, sets monetary policy for the entire US economy. The Board meets every six weeks (in the Federal Open Market Committee, or FOMC) to set the target interest rate for overnight interbank lending (the federal funds rate).

This target interest rate is the single most important policy tool in US economic management. By raising or lowering this rate, the Fed influences all other interest rates in the economy and, ultimately, inflation, employment, and economic growth.

Open market operations

The Federal Reserve conducts open market operations (OMOs) to implement its interest rate decisions. The Fed’s Trading Desk, located at the Federal Reserve Bank of New York, buys and sells government securities, creating or draining bank reserves. This buying and selling moves interest rates toward the target.

In the post-2008 crisis era, the Fed has conducted massive quantitative easing (QE) programs, buying trillions of dollars of government bonds and mortgage-backed securities to inject liquidity into the financial system.

Banking supervision and regulation

The Federal Reserve supervises large banks and state-chartered banks that are members of the Federal Reserve System. This supervisory function includes examining banks for safety and soundness, enforcing consumer protection regulations, and monitoring financial system stability.

This dual role — both monetary authority and banking regulator — is distinctive. The Fed’s supervisory role gives it deep insight into bank operations and helps it identify emerging risks to financial stability.

Payments system infrastructure

The Federal Reserve operates the US payments system. All banks maintain reserve accounts at their regional Federal Reserve Bank; these accounts are used to settle interbank transactions daily. The Fed’s real-time gross settlement system (Fedwire) is the rails through which trillions of dollars of high-value transactions flow daily.

The Fed also operates the Automated Clearing House (ACH), which processes lower-value transactions like direct deposits and bill payments.

Lender of last resort

The Federal Reserve serves as “lender of last resort” — it provides emergency lending to banks facing liquidity crises. During the 2008 financial crisis, the Fed used this power extensively, including inventing new lending facilities to stabilize the financial system.

This lender-of-last-resort function is essential to financial system stability; the mere knowledge that the Fed will provide emergency liquidity reduces the likelihood of panic-driven bank runs.

International role

The Federal Reserve, particularly the Federal Reserve Bank of New York, plays an outsized role in international financial markets. The dollar’s role as the world’s reserve currency makes US interest rates and Fed policy decisions consequential globally.

The Fed also maintains relationships with other central banks worldwide and participates in international financial cooperation to manage systemic risks.

See also