Introduction to Financial Services: The Federal Reserve
link to page 1 
Updated January 5, 2023
Introduction to Financial Services: The Federal Reserve
Structure of the Federal Reserve
stock pays dividends of 6% for banks with less than $10
The Federal Reserve Act of 1913 (12 U.S.C. 221 et seq.)
billion in assets and the lower of 6% or the 10-year
created the Federal Reserve (Fed) as the nation’s central
Treasury yield for banks with more than $10 billion in
bank. The Fed is composed of 12 regional Federal Reserve
assets. Member banks choose two-thirds of the boards at the
banks overseen by a Board of Governors in Washington,
regional Fed banks.
DC. Figure 1 illustrates the city in which each bank is
Responsibilities of the Federal Reserve
headquartered and the area of each bank’s jurisdiction.
The Fed’s responsibilities fall into four main categories:
The board is composed of seven governors nominated by
monetary policy, lender of last resort, regulation of certain
the President and confirmed by the Senate. The President
banks and other financial firms, and provision and oversight
selects (and the Senate confirms) a chair and two vice
of certain payment systems.
chairs from among the governors, one of whom is
Monetary Policy. The Fed’s primary monetary policy
responsible for supervision. The governors serve
instrument is the federal funds rate (the overnight bank
nonrenewable 14-year terms; the chair and vice chairs serve
lending rate). The Fed influences interest rates to affect
renewable four-year terms. Board members are chosen
interest-sensitive spending on capital investment, consumer
without regard to political affiliation. Regional bank
durables, and housing. Interest rates also indirectly
presidents are chosen by their boards with the approval of
influence the value of the dollar and, therefore, spending on
the Board of Governors.
exports and imports. The Fed reduces rates to stimulate
Figure 1. Federal Reserve Districts
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. The Fed holds these securities as assets
on its balance sheet. Often, these transactions were made on
a temporary basis using repurchase agreements, known as
repos. Since the 2007-2009 financial crisis, the Fed has
primarily used a new method for targeting interest rates that
relies on banks maintaining large reserves at the Fed and
Source: Federal Reserve.
paying banks interest on those reserves. The Fed sets that
interest rate to influence the federal funds rate. In addition,
In general, policy is formulated by the board and carried out
monetary policy can involve foreign exchange operations,
by the regional banks. Monetary policy decisions, however,
although these are rare. The FOMC directs the New York
are made by the Federal Open Market Committee (FOMC),
Fed to conduct open market and foreign exchange
which is composed of the seven governors, the president of
operations. The Fed influences growth in the money supply
the New York Fed, and four other regional bank presidents.
through its control over bank reserves and currency in
Representation for these four seats rotates among the other
circulation, which are largely liabilities on its balance sheet.
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
funds rate to zero and conducted large-scale asset purchases
The Fed’s budget is not subject to congressional
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 increased
and the income generated by securities it owns. Its income
the size of its balance sheet. Following a period when rates
exceeds its expenses, and it remits most of its net income to
rose and the balance sheet shrunk, the Fed began to cut
the Treasury, where it is added to general revenues.
rates and expand its balance sheet again in 2019. At the
The Fed’s capital
onset of the pandemic, the Fed swiftly lowered interest rates
consists of stock and a surplus. The
to zero and increased its use of QE and repos to boost
surplus is capped at $6.825 billion by law. (Congress
reduced the Fed’s financial surplus as a budgetary “pay for”
liquidity. This caused the balance sheet to double in 18
months, which has boosted Fed remittances to the Treasury.
in P.L. 114-94, P.L. 115-123, and P.L. 115-174.) Private
banks regulated by the Fed buy stock in the Fed to become
Lender of Last Resort. Despite their name, Federal
member banks. Membership is mandatory for federally
Reserve banks do not carry out any banking activities, with
chartered banks but optional for state-chartered banks. The
https://crsreports.congress.gov
Introduction to Financial Services: The Federal Reserve
one limited exception: The Fed traditionally acts as lender
hikes will be needed to restore low inflation. Some critics
of last resort by making short-term, collateralized loans to
question whether the hikes will be sufficient to reduce
banks through its discount window. The Fed generally sets
inflation, while others fear that the hikes will cause a
the discount rate charged for these loans above market
recession.
rates. In normal market conditions, the Fed’s lending
Diversity. Some Members of Congress have expressed
operations are minimal. In crises, such as the 2008 financial
concern over a lack of diversity at the Fed and in the
crisis and COVID-19 pandemic, the Fed has created
banking sector and believe that the Fed could do more to
emergency facilities using emergency authority to extend
eliminate racial disparities. The Dodd-Frank Act (P.L. 111-
its lender-of-last-resort function to nonbanks and markets.
203) created Offices of Minority and Women Inclusion for
Regulation. The Fed regulates bank holding companies
the Federal Reserve System. Bills in the 117th Congress
(including the largest banks), some foreign banks, and some
would have required the Fed to exercise its duties to foster
state-chartered banks. Large banks are subject to enhanced
the elimination of (and testify on its efforts to eliminate)
prudential regulation administered by the Fed. The Fed’s
racial disparities and would have required the Fed (and
regulatory responsibilities overlap with those of other bank
other bank regulators) to include diversity in their
regulators—the Consumer Financial Protection Bureau
supervisory ratings of banks.
(CFPB), the Federal Deposit Insurance Corporation (FDIC),
Central Bank Digital Currency (CBDC). With the rise of
and the Office of the Comptroller of the Currency (OCC).
private digital currencies, such as Bitcoin, some have called
The Fed shares responsibility for maintaining financial
for the Fed to create a “digital dollar” or CBDC. The Fed
stability with the Financial Stability Oversight Council
has not yet taken a position on the desirability of a CBDC
(FSOC) and its members. (FSOC is a council of regulators,
but “does not intend to proceed with issuance of a CBDC
including the Fed, headed by the Treasury Secretary.) The
without clear support from the executive branch and from
Fed participates in intergovernmental fora, such as the
Congress, ideally in the form of a specific authorizing law.”
Financial Stability Board and the Basel Committee on
Critics question whether the costs of introducing a CBDC
Banking Supervision, alongside other U.S. agencies.
would outweigh the benefits. Policymakers have debated
Payment Systems. The Fed operates key payment systems,
how to balance privacy and preventing illicit activity and
including check clearing and interbank transfers, and
whether individuals should be able to store CBDC balances
oversees some private-sector payment systems. The Fed is
in personal accounts at the Fed.
planning to launch FedNow, a real-time payment system for
Climate Change. In 2020, the Fed joined the
instantaneous payment settlement, in 2023. It also acts as
the federal government’s fiscal agent—
intergovernmental Network for Greening the Financial
federal receipts and
payments flow through Treasury’s accounts at the Fed.
System. In 2021, the Fed created two internal committees
related to climate risk. In 2022, the Fed announced the six
Mandate and Congressional Oversight
largest banks would participate in a climate scenario
Congress has delegated monetary policy to the Fed but
analysis to quantify their exposure to climate risk. Some
conducts oversight to ensure the Fed meets its statutory
critics believe the Fed should be doing more to combat
mandate of “maximum employment, stable prices, and
climate change, such as “stress tests” linking capital
moderate long-term interest rates” (12 U.S.C. 225a). The
requirements to climate exposure. Other critics believe that
Fed has defined stable prices as a longer-run goal of 2%
climate change is outside of the Fed’s mission and the Fed
inflation as measured by the personal consumer
lacks the tools to effectively address it.
expenditures price index.
Regulation. The optimal tradeoff between the benefits and
The Fed is more independent from Congress and the
costs of financial regulation continues to be debated, with
Administration than most agencies are. Economists have
banks arguing that they face too much regulatory burden,
justified the Fed’s independence on the grounds that
disadvantaging them compared to nonbank competitors.
monetary policy decisions that are insulated from short-
Many in Congress have expressed concern about whether
term political pressures result in better economic outcomes.
the Fed is susceptible to regulatory capture, the concept
There is an inherent trade-off between independence and
that regulated entities have undue influence over regulation.
accountability, however. The chair and vice chair for
CRS Resources
supervision are statutorily required to testify semi-annually
CRS In Focus IF11751, Introduction to U.S. Economy:
before the committees of jurisdiction, and the committees
Monetary Policy
regularly conduct other hearings on the Fed (12 U.S.C.
225b and 247b).
CRS In Focus IF12147, The Federal Reserve’s Balance
Policy Issues
Sheet and Quantitative Easing
Monetary Policy and Inflation. Since 2021, inflation has
CRS Report R47273, Inflation in the U.S. Economy:
risen to high levels last seen in the early 1980s. Before
Causes and Policy Options
2021, inflation was consistently low and stable. Concerned
that the pandemic could undermine the recovery and
CRS Report R46850, Central Bank Digital Currencies:
initially viewing high inflation as transitory, the Fed waited
Policy Issues
until March 2022 to begin raising interest rates and to end
its asset purchases. In June 2022, the Fed began gradually
reducing its balance sheet. Playing catch up, the Fed raised
Marc Labonte, Specialist in Macroeconomic Policy
rates aggressively in 2022 and still expects additional rate
IF10054
https://crsreports.congress.gov
Introduction to Financial Services: The Federal Reserve
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF10054 · VERSION 16 · UPDATED
Updated January 5, 2023
Introduction to Financial Services: The Federal Reserve
Structure of the Federal Reserve
stock pays dividends of 6% for banks with less than $10
The Federal Reserve Act of 1913 (12 U.S.C. 221 et seq.)
billion in assets and the lower of 6% or the 10-year
created the Federal Reserve (Fed) as the nation’s central
Treasury yield for banks with more than $10 billion in
bank. The Fed is composed of 12 regional Federal Reserve
assets. Member banks choose two-thirds of the boards at the
banks overseen by a Board of Governors in Washington,
regional Fed banks.
DC. Figure 1 illustrates the city in which each bank is
Responsibilities of the Federal Reserve
headquartered and the area of each bank’s jurisdiction.
The Fed’s responsibilities fall into four main categories:
The board is composed of seven governors nominated by
monetary policy, lender of last resort, regulation of certain
the President and confirmed by the Senate. The President
banks and other financial firms, and provision and oversight
selects (and the Senate confirms) a chair and two vice
of certain payment systems.
chairs from among the governors, one of whom is
Monetary Policy. The Fed’s primary monetary policy
responsible for supervision. The governors serve
instrument is the federal funds rate (the overnight bank
nonrenewable 14-year terms; the chair and vice chairs serve
lending rate). The Fed influences interest rates to affect
renewable four-year terms. Board members are chosen
interest-sensitive spending on capital investment, consumer
without regard to political affiliation. Regional bank
durables, and housing. Interest rates also indirectly
presidents are chosen by their boards with the approval of
influence the value of the dollar and, therefore, spending on
the Board of Governors.
exports and imports. The Fed reduces rates to stimulate
Figure 1. Federal Reserve Districts
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. The Fed holds these securities as assets
on its balance sheet. Often, these transactions were made on
a temporary basis using repurchase agreements, known as
repos. Since the 2007-2009 financial crisis, the Fed has
primarily used a new method for targeting interest rates that
relies on banks maintaining large reserves at the Fed and
Source: Federal Reserve.
paying banks interest on those reserves. The Fed sets that
interest rate to influence the federal funds rate. In addition,
In general, policy is formulated by the board and carried out
monetary policy can involve foreign exchange operations,
by the regional banks. Monetary policy decisions, however,
although these are rare. The FOMC directs the New York
are made by the Federal Open Market Committee (FOMC),
Fed to conduct open market and foreign exchange
which is composed of the seven governors, the president of
operations. The Fed influences growth in the money supply
the New York Fed, and four other regional bank presidents.
through its control over bank reserves and currency in
Representation for these four seats rotates among the other
circulation, which are largely liabilities on its balance sheet.
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
funds rate to zero and conducted large-scale asset purchases
The Fed’s budget is not subject to congressional
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 increased
and the income generated by securities it owns. Its income
the size of its balance sheet. Following a period when rates
exceeds its expenses, and it remits most of its net income to
rose and the balance sheet shrunk, the Fed began to cut
the Treasury, where it is added to general revenues.
rates and expand its balance sheet again in 2019. At the
The Fed’s capital
onset of the pandemic, the Fed swiftly lowered interest rates
consists of stock and a surplus. The
to zero and increased its use of QE and repos to boost
surplus is capped at $6.825 billion by law. (Congress
reduced the Fed’s financial surplus as a budgetary “pay for”
liquidity. This caused the balance sheet to double in 18
months, which has boosted Fed remittances to the Treasury.
in P.L. 114-94, P.L. 115-123, and P.L. 115-174.) Private
banks regulated by the Fed buy stock in the Fed to become
Lender of Last Resort. Despite their name, Federal
member banks. Membership is mandatory for federally
Reserve banks do not carry out any banking activities, with
chartered banks but optional for state-chartered banks. The
https://crsreports.congress.gov
Introduction to Financial Services: The Federal Reserve
one limited exception: The Fed traditionally acts as lender
hikes will be needed to restore low inflation. Some critics
of last resort by making short-term, collateralized loans to
question whether the hikes will be sufficient to reduce
banks through its discount window. The Fed generally sets
inflation, while others fear that the hikes will cause a
the discount rate charged for these loans above market
recession.
rates. In normal market conditions, the Fed’s lending
Diversity. Some Members of Congress have expressed
operations are minimal. In crises, such as the 2008 financial
concern over a lack of diversity at the Fed and in the
crisis and COVID-19 pandemic, the Fed has created
banking sector and believe that the Fed could do more to
emergency facilities using emergency authority to extend
eliminate racial disparities. The Dodd-Frank Act (P.L. 111-
its lender-of-last-resort function to nonbanks and markets.
203) created Offices of Minority and Women Inclusion for
Regulation. The Fed regulates bank holding companies
the Federal Reserve System. Bills in the 117th Congress
(including the largest banks), some foreign banks, and some
would have required the Fed to exercise its duties to foster
state-chartered banks. Large banks are subject to enhanced
the elimination of (and testify on its efforts to eliminate)
prudential regulation administered by the Fed. The Fed’s
racial disparities and would have required the Fed (and
regulatory responsibilities overlap with those of other bank
other bank regulators) to include diversity in their
regulators—the Consumer Financial Protection Bureau
supervisory ratings of banks.
(CFPB), the Federal Deposit Insurance Corporation (FDIC),
Central Bank Digital Currency (CBDC). With the rise of
and the Office of the Comptroller of the Currency (OCC).
private digital currencies, such as Bitcoin, some have called
The Fed shares responsibility for maintaining financial
for the Fed to create a “digital dollar” or CBDC. The Fed
stability with the Financial Stability Oversight Council
has not yet taken a position on the desirability of a CBDC
(FSOC) and its members. (FSOC is a council of regulators,
but “does not intend to proceed with issuance of a CBDC
including the Fed, headed by the Treasury Secretary.) The
without clear support from the executive branch and from
Fed participates in intergovernmental fora, such as the
Congress, ideally in the form of a specific authorizing law.”
Financial Stability Board and the Basel Committee on
Critics question whether the costs of introducing a CBDC
Banking Supervision, alongside other U.S. agencies.
would outweigh the benefits. Policymakers have debated
Payment Systems. The Fed operates key payment systems,
how to balance privacy and preventing illicit activity and
including check clearing and interbank transfers, and
whether individuals should be able to store CBDC balances
oversees some private-sector payment systems. The Fed is
in personal accounts at the Fed.
planning to launch FedNow, a real-time payment system for
Climate Change. In 2020, the Fed joined the
instantaneous payment settlement, in 2023. It also acts as
the federal government’s fiscal agent—
intergovernmental Network for Greening the Financial
federal receipts and
payments flow through Treasury’s accounts at the Fed.
System. In 2021, the Fed created two internal committees
related to climate risk. In 2022, the Fed announced the six
Mandate and Congressional Oversight
largest banks would participate in a climate scenario
Congress has delegated monetary policy to the Fed but
analysis to quantify their exposure to climate risk. Some
conducts oversight to ensure the Fed meets its statutory
critics believe the Fed should be doing more to combat
mandate of “maximum employment, stable prices, and
climate change, such as “stress tests” linking capital
moderate long-term interest rates” (12 U.S.C. 225a). The
requirements to climate exposure. Other critics believe that
Fed has defined stable prices as a longer-run goal of 2%
climate change is outside of the Fed’s mission and the Fed
inflation as measured by the personal consumer
lacks the tools to effectively address it.
expenditures price index.
Regulation. The optimal tradeoff between the benefits and
The Fed is more independent from Congress and the
costs of financial regulation continues to be debated, with
Administration than most agencies are. Economists have
banks arguing that they face too much regulatory burden,
justified the Fed’s independence on the grounds that
disadvantaging them compared to nonbank competitors.
monetary policy decisions that are insulated from short-
Many in Congress have expressed concern about whether
term political pressures result in better economic outcomes.
the Fed is susceptible to regulatory capture, the concept
There is an inherent trade-off between independence and
that regulated entities have undue influence over regulation.
accountability, however. The chair and vice chair for
CRS Resources
supervision are statutorily required to testify semi-annually
CRS In Focus IF11751, Introduction to U.S. Economy:
before the committees of jurisdiction, and the committees
Monetary Policy
regularly conduct other hearings on the Fed (12 U.S.C.
225b and 247b).
CRS In Focus IF12147, The Federal Reserve’s Balance
Policy Issues
Sheet and Quantitative Easing
Monetary Policy and Inflation. Since 2021, inflation has
CRS Report R47273, Inflation in the U.S. Economy:
risen to high levels last seen in the early 1980s. Before
Causes and Policy Options
2021, inflation was consistently low and stable. Concerned
that the pandemic could undermine the recovery and
CRS Report R46850, Central Bank Digital Currencies:
initially viewing high inflation as transitory, the Fed waited
Policy Issues
until March 2022 to begin raising interest rates and to end
its asset purchases. In June 2022, the Fed began gradually
reducing its balance sheet. Playing catch up, the Fed raised
Marc Labonte, Specialist in Macroeconomic Policy
rates aggressively in 2022 and still expects additional rate
IF10054
https://crsreports.congress.gov
Introduction to Financial Services: The Federal Reserve
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF10054 · VERSION 16 · UPDATED