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Updated January 4, 2021
Introduction to Financial Services: The Federal Reserve
Structure of the Federal Reserve
member banks. Membership is mandatory for national
The Federal Reserve Act (12 U.S.C. 221 et seq.) created the
banks, but optional for state banks. The stock pays
Federal Reserve (Fed) as the nation’s central bank in 1913.
dividends of 6% for banks with less than $10 billion in
The Fed is composed of 12 regional Federal Reserve banks
assets and the lower of 6% or the 10-year Treasury yield for
overseen by a Board of Governors in Washington, DC.
banks with more than $10 billion in assets. Stockholders
Figure 1 illustrates the city in which each bank is
choose two-thirds of the boards at the regional Fed banks.
headquartered and the area of each bank’s jurisdiction. The
Board is composed of seven governors nominated by the
Responsibilities of the Federal Reserve
President and confirmed by the Senate. The President
The Fed’s responsibilities fall into four main categories:
selects (and the Senate confirms) a chair and two vice
monetary policy, lender of last resort, prudential
chairs from among the governors, one of whom is
supervision of certain banks and other financial firms, and
responsible for supervision. The governors serve
provision and oversight of payment systems.
nonrenewable 14-year terms, but the chair and vice chairs
serve renewable 4-year terms. Jerome Powell’s term as
Monetary Policy. The Fed’s primary monetary policy
chair began February 5, 2018. Board members are chosen
instrument is the federal funds rate (the overnight bank
without regard to political affiliation. Regional bank
lending rate). The Fed influences interest rates to affect
presidents are chosen by their boards, not by the President,
interest-sensitive spending on capital investment, consumer
with the approval of the Board of Governors.
durables, and housing. Interest rates also indirectly
influence the value of the dollar and, therefore, spending on
Figure 1. Federal Reserve Districts
exports and imports. The Fed reduces rates to stimulate
economic activity and raises rates to slow activity.
Monetary policy is considered a blunt instrument that
cannot be targeted to affect specific regions, certain
industries, or the income distribution.
Formerly, the Fed targeted the federal funds rate primarily
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 were 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. Since the 2007-2009
financial crisis, the Fed has primarily used a new method
Source: Federal Reserve.
for targeting interest rates that relies on banks maintaining
large reserves at the Fed and paying banks interest on those
In general, policy is formulated by the board and carried out
reserves. In addition, monetary policy can involve foreign
by the regional banks. Monetary policy decisions, however,
exchange operations, although these are rare. Open market
are made by the Federal Open Market Committee (FOMC),
and foreign exchange operations are conducted by the New
which is composed of the seven governors, the president of
York Fed per the FOMC’s directives. The Fed influences
the New York Fed, and four other regional bank presidents.
growth in the money supply through its control over bank
Representation for these four seats rotates among the other
reserves and currency in circulation.
11 regional banks. The FOMC meets at least every six
weeks to review the stance of monetary policy.
During the financial crisis, the Fed reduced the federal
The Fed’s budget is not subject to congressional
funds rate to zero and conducted large-scale asset purchases
of Treasury- and mortgage-backed securities from 2008 to
appropriations or authorizations. The Fed is funded by fees
2014—known as quantitative easing (QE)—that quintupled
and the income generated by securities it owns. Its income
the size of its balance sheet. The Fed then began to
exceeds its expenses, and it remits most of its net income to
normalize monetary policy. From 2015 to 2018, the Fed
the Treasury, where it is used to reduce the federal debt.
initiated a series of increases in the federal funds rate. From
2017 to 2019, the Fed modestly reduced the size of its
The Fed’s capital consists of stock and a surplus. The
balance sheet. However, the Fed began to cut rates and
surplus is capped at $6.825 billion by law. (Congress
reduced the Fed’s financial surplus as a budgetary “pay for”
expand its balance sheet again in 2019, which remains

much larger than its pre-crisis size. A large balance sheet
in P.L. 114-94, P.L. 115-123, and P.L. 115-174.) Private
has boosted Fed remittances to the Treasury in recent years.
banks regulated by the Fed buy stock in the Fed to become
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Introduction to Financial Services: The Federal Reserve
Lender of Last Resort. Despite their name, Federal
justified the Fed’s independence on the grounds that
Reserve banks do not carry out any banking activities, with
monetary policy decisions that are insulated from short-
one limited exception. The Fed traditionally acts as lender
term political pressures result in better economic outcomes.
of last resort by making short-term, collateralized loans to
There is an inherent trade-off between independence and
banks through its discount window. The Fed generally sets
accountability, however.
the discount rate charged for these loans above market
rates. In normal market conditions, the Fed’s lending
Nevertheless, the Fed’s independence has limits . Contrary
operations are minimal. In crises, the Fed has emergency
to popular belief, the Government Accountability Office
authority to extend its lender of last resort function to
already audits the Fed upon congressional request, but it is
nonbank firms and markets.
prohibited by law (31 U.S.C. 714) from conducting
economic analyses of monetary or lender-of-last-resort
Regulation. The Fed regulates bank holding companies
activities. The Fed is statutorily required to testify
(including the largest banks), some foreign banks, and some
semiannually before and present a written report to the
state banks. The Fed’s regulatory responsibilities overlap
committees of jurisdiction. Congress has debated whether
with those of other bank regulators—the Consumer
the Fed should report to it more frequently and in more
Financial Protection Bureau (CFPB), the Federal Deposit
detail. In the 116th Congress, H.R. 974 would have required
Insurance Corporation (FDIC), and the Office of the
the vice chair for supervision to provide written testimony
Comptroller of the Currency (OCC). The Fed shares
and the chair to testify if the vice chair position is vacant.
responsibility for maintaining financial stability with the
Financial Stability Oversight Council (FSOC) and its
Congress has also debated what types of information the
members. FSOC is a council of regulators, including the
Fed should publicly disclose. Disclosure helps Congress
Fed, headed by the Treasury Secretary. The Fed participates
and the public to better understand the Fed’s actions. Up to
in intergovernmental fora, such as the Financial Stability
a point, this makes monetary and regulatory policy more
Board and the Basel Committee on Banking Supervision,
effective, but too much disclosure could make both less
alongside other U.S. agencies.
effective because they rely on market-sensitive and
confidential information. The Dodd-Frank Act (P.L. 111-
Payment Systems. The Fed operates key payment systems,
203) required the Fed to release information with a lag on
including check clearing and interbank transfers, and
the identities of all borrowers and the terms of borrowing.
oversees private-sector payment systems. In 2019, the Fed
announced that it would create a real-time payment system
Regulatory Relief. The Fed has recently been
for instantaneous payment settlement. It also acts as the
implementing regulatory relief for large and small banks.
federal government’s fiscal agent—federal receipts and
Finding the optimal trade-off between the benefits and costs
payments flow through Treasury’s accounts at the Fed.
of financial regulation continues to be debated. Congress
has also been concerned about whether the Fed is
Policy Issues
susceptible to regulatory capture, the concept that regulated
COVID-19 Pandemic Response. In response to the
entities have undue influence over regulation.
pandemic, the Fed swiftly lowered interest rates to zero,
increased its use of QE and repos, and announced a plethora
Diversity. Some Members of Congress have expressed
of emergency programs to stabilize the financial system and
concern over a lack of diversity at the Fed. The Dodd-Frank
assist entities cut off from credit markets. The CARES Act
Act created Offices of Minority and Women Inclusion for
(P.L. 116-136) provided at least $454 billion to support
the Federal Reserve System. In the 116th Congress, H.R.
some of these programs, including the Main Street Lending
281 would have required diverse candidates to be
Program and the Municipal Liquidity Facility. The
interviewed when selecting Fed regional bank presidents.
programs were much smaller than their announced size and
expired at the end of 2020. Congress has debated (1)
Central Bank Digital Currency (CBDC). With the rise of
whether the programs should be revived given financial
private digital currencies, such as Bitcoin, some have called
conditions have normalized but pandemic disruptions
for the Fed to create a CBDC. Critics question whether the
persist, and (2) whether they fell short of their intended size
costs of introducing a CBDC would outweigh the benefits.
because private credit conditions improved or because the
Open questions remain about who could hold CBDCs, what
programs’ terms were too stringent.
they could be used for, and whether individuals would be
able to store CBDCs in personal accounts at the Fed.
Congressional Oversight. Congress has delegated
monetary policy to the Fed but conducts oversight to ensure
CRS Resources
the Fed meets its statutory mandate of “maximum
CRS Report R46411, The Federal Reserve’s Response to
employment, stable prices, and moderate long-term interest
COVID-19: Policy Issues, by Marc Labonte
rates.” The Fed has defined stable prices as a longer-run
goal of 2% inflation. Following a 2020 review of its
CRS Report RL30354, Monetary Policy and the Federal
monetary policy strategy, tools, and communications, the
Reserve: Current Policy and Conditions, by Marc Labonte
Fed pledged to allow inflation to run slightly above 2% to
make up for inflation recently falling short of 2%.
Marc Labonte, Specialist in Macroeconomic Policy
IF10054
The Fed is more independent from Congress and the
Administration than most agencies. Economists have
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Introduction to Financial Services: The Federal Reserve


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