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Updated January 8, 2019
Introduction to Financial Services: The Federal Reserve
Structure of the Federal Reserve
assets and the lower of 6% or the 10-year Treasury yield for
The Federal Reserve Act (12 U.S.C. 221 et seq.) created the
banks with more than $10 billion in assets. Stockholders
Fed as the nation’s central bank in 1913. The Fed is
choose two-thirds of the board at the regional Fed banks.
composed of 12 regional Federal Reserve banks overseen
by a Board of Governors in Washington, DC. Figure 1
Responsibilities of the Federal Reserve
illustrates the city in which each bank is headquartered and
The Fed’s responsibilities fall into four main categories:
the area of each bank’s jurisdiction. The board is composed
monetary policy, lender of last resort, prudential
of seven governors nominated by the President and
supervision of certain banks and other financial firms, and
confirmed by the Senate. The President selects (and the
provision and oversight of payment systems.
Senate confirms) a chair and two vice chairs from among
the governors; one vice chair is responsible for supervision.
Monetary Policy. The Fed’s primary monetary policy
The governors serve nonrenewable 14-year terms, but the
instrument is the federal funds rate (the overnight bank
chair and vice chairs serve renewable 4-year terms. Jerome
lending rate). The Fed influences interest rates to affect
Powell’s term as Chair began February 5, 2018. Board
interest-sensitive spending on capital investment, consumer
members are chosen without regard to political affiliation.
durables, and housing. Interest rates also indirectly
Regional bank presidents are chosen by their boards, not by
influence the value of the dollar and, therefore, spending on
the President, with the approval of the Board of Governors.
exports and imports. The Fed reduces rates to stimulate
economic activity and raises rates to slow activity.
Figure 1. Federal Reserve Districts
Monetary policy is considered a blunt instrument that
cannot be targeted to affect specific regions, certain
industries, or the income distribution.
The Fed targets the federal funds rate through open market
operations—the purchase and sale of U.S. Treasury
securities mainly from primary dealers (who specialize in
trading government securities) in the secondary market.
Often, these transactions are made on a temporary basis
using repurchase agreements, known as repos. The Fed sets
reserve requirements and the interest rate it pays banks to
hold reserves. In addition, monetary policy can involve
foreign exchange operations, although these are rare. Open
market and foreign exchange operations are conducted by
Source: Federal Reserve.
the New York Fed per the board’s directives. The Fed
influences the size of the money supply through its control
over the amount of bank reserves and currency (Federal
Generally, policy is formulated by the board and carried out
Reserve notes) in circulation.
by the regional banks. Monetary policy decisions, however,
are made by the Federal Open Market Committee (FOMC),
The Fed conducted large-scale asset purchases of Treasury-
which is composed of the seven governors, the president of
and mortgage-backed securities from 2008 to 2014—known
the New York Fed, and four other regional bank presidents.
as quantitative easing—that increased the size of its balance
Representation for these four seats rotates among the other
sheet. Since then, the Fed has begun to normalize monetary
11 regional banks. The FOMC meets at least every six
policy. In December 2015, the Fed raised the federal funds
weeks to review the stance of monetary policy.
rate above zero, where it had been since December 2008. In
The Fed’s budget is not subject to congressional
September 2017, the Fed began gradually winding down its
balance sheet. Quantitative easing has boosted the Fed’s
appropriations or authorizations. The Fed is funded by fees
remittances to the Treasury in recent years, but
and the income generated by securities it owns. Its income
normalization is likely to reduce remittances.
exceeds its expenses, and it remits most of its net income to
the Treasury, where it is used to reduce the federal debt.
Lender of Last Resort. Despite their name, Federal
The Fed’s capital
Reserve banks do not carry out any banking activities, with
consists of stock and a surplus. The Fed’s
one limited exception. The Fed traditionally acts as lender
surplus is capped at $10 billion by law. Private banks
of last resort by making short-term, collateralized loans to
regulated by the Fed buy stock in the Fed to become
banks through its discount window. The Fed generally sets
member banks. Membership is mandatory for national
the discount rate charged for these loans above market
banks, but optional for state banks. The stock pays
rates. In normal market conditions, the Fed’s lending
dividends of 6% for banks with less than $10 billion in
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Introduction to Financial Services: The Federal Reserve
operations are minimal. In the 2007-2009 financial crisis, it
last-resort activities. The Dodd-Frank Act broadened
created a number of temporary emergency facilities to
GAO’s audit authority and required two one-time audits of
provide assistance to the broader financial system.
the Fed. Although removing GAO audit restrictions may
increase accountability, Fed leaders oppose such a change,
Regulation. The Fed regulates bank holding companies
arguing that it would undermine the Fed’s independence
(including the largest banks), some foreign banks, and some
from Congress and politicize monetary policy.
state banks. The Fed’s regulatory responsibilities overlap
with those of other regulators. Responsibility for regulating
Balance Sheet. Congress has conducted oversight of the
banks is divided among the Fed, the Consumer Financial
gradual wind down of the Fed’s large balance sheet. The
Protection Bureau (CFPB), the Federal Deposit Insurance
Fed is expected to reach a decision on the ultimate size of
Corporation (FDIC), and the Office of the Comptroller of
the balance sheet and bank reserves and to what extent it
the Currency (OCC). The Fed shares responsibility for
will rely on interest on bank reserves for conducting
maintaining financial stability with the Financial Stability
monetary policy when policy normalization is completed.
Oversight Council (FSOC) and its members. FSOC is a
Congress has also reduced the Fed’s financial surplus as a
council of regulators, including the Fed, headed by the
budgetary “pay for” in recent unrelated acts (P.L. 114-94,
Treasury Secretary. The Fed participates in
P.L. 115-123, P.L. 115-174).
intergovernmental forums, such as the Financial Stability
Board and the Basel Committee on Banking Supervision,
Regulation. Congress granted large and small banks
with other U.S. agencies.
regulatory relief from Fed regulation in P.L. 115-174.
Finding the optimal tradeoff between the benefits and costs
Payment Systems. The Fed operates key payment systems,
of financial regulation continues to be debated. Congress
including those for check clearing and interbank transfers,
has also been concerned about whether the Fed is
and oversees other payment systems. It also acts as the
susceptible to regulatory capture, the concept that regulated
federal government’s fiscal agent—federal receipts and
entities have undue influence over regulation.
payments flow through Treasury’s accounts at the Fed.
Emergency Lending. The Fed’s use of its emergency
Policy Issues
authority (Section 13(3) of the Federal Reserve Act) during
Congressional Oversight. Congress has delegated
the financial crisis—notably, to prevent AIG and Bear
monetary policy to the Fed but conducts oversight to ensure
Stearns from failing—was controversial. The Dodd-Frank
the Fed meets its statutory mandate of “maximum
Act modified Section 13(3) to restrict future intervention on
employment, stable prices, and moderate long-term interest
behalf of a failing firm. Congress has debated whether to
rates.” The Fed has defined stable prices as a longer-run
place additional restrictions on the use of Section 13(3).
goal of 2% inflation.
The Fed would like its emergency authority to be broad
given the unpredictable nature of financial instability, but
The Fed is more independent from Congress and the
open-ended authority could potentially be used in ways that
Administration than most agencies. Economists have
Congress did not intend, as the crisis illustrated.
justified the Fed’s independence on the grounds that
monetary policy decisions that are insulated from short-
Governance. Congress has debated changes to the Fed’s
term political pressures result in better economic outcomes.
governance structure. Proposals include changing the
There is an inherent tradeoff between independence and
voting balance between Fed governors and presidents on
accountability, however.
the FOMC; making the New York Fed president a
presidential appointee; and changing how the regional bank
The Fed is statutorily required to testify semiannually
directors and presidents are selected. Some Members of
before and present a written report to the House Financial
Congress have also expressed concern over a lack of
Services Committee and the Senate Banking, Housing, and
diversity at the Fed. The Dodd-Frank Act created Offices of
Urban Affairs Committee. Congress has debated whether
Minority and Women Inclusion throughout the Federal
the Fed should report to it more frequently and in more
Reserve System.
detail. Congress has also debated what types of information
the Fed should publicly disclose. Disclosure helps Congress
CRS Resources
and the public to better understand the Fed’s actions. Up to
CRS Report RL30354, Monetary Policy and the Federal
a point, this makes monetary and regulatory policy more
Reserve: Current Policy and Conditions, by Marc Labonte
effective, but too much disclosure could make both less
effective because they rely on market-sensitive and
CRS Report R42079, Federal Reserve: Oversight and
confidential information. The Dodd-Frank Act (P.L. 111-
Disclosure Issues, by Marc Labonte
203) required the Fed to release information with a lag on
the identities of all borrowers and the terms of borrowing.
CRS Report R44185, Federal Reserve: Emergency
Lending, by Marc Labonte
GAO Audits. To enhance oversight, Congress has
considered removing statutory restrictions on Government
Accountability Office (GAO) audits of the Fed. Contrary to
Marc Labonte,
popular belief, GAO already audits the Fed upon
IF10054
congressional request, but it is prohibited by law from
conducting economic analyses of monetary or lender-of-
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Introduction to Financial Services: The Federal Reserve
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