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1 1 (January 4, 2021)

handle is hein.crs/goveasn0001 and id is 1 raw text is: $ frw ~iri~ heIe~i~a v~ e rn 91 Updated January 4, 2021 Introduction to Financial Services: The Federal Reserve Structure of the Federal Reserve The Federal Reserve Act (12 U.S.C. 221 et seq.) created the Federal Reserve (Fed) as the nation's centralbankin 1913. The Fed is composed of 12 regional Federal Reserve banks overseen by a Board of Governors in Washington, DC. Figure 1 illustrates the city in which eachbankis headquartered andthe area ofeach bank'sjuris diction. The Board is composed ofsevengovernors nominatedby the President and confirmed by the Senate. The President selects (and the Senate confirms) a chair and two vice chairs fromamong the governors, oneofwhomis responsible for supervision. The governors serve nonrenewable 14-year terms, but the chair and vice chairs serve renewable 4-year terms. Jerome Powell's termas chairbegan February 5, 2018. Board members are chosen without regard to political affiliation. Regional bank presidents are chosenby theirboards, notby thePresident, with the approval of the Board of Governors. Figure 1. Federal Reserve Districts Source: Federal Reserve. In general, policy is formulatedby theboard and carried out by the regionalbanks. Monetarypolicy decisions, however, are made by the FederalOpen Market Committee (FOMC), which is composed of the seven governors, the president of the New York Fed, and four other regional bankpresidents. Representation for these four seats rotates among the other 11 regionalbanks. The FOMC meets at least every six weeks to review the stance of monetary policy. The Fed's budget is not subject to congressional appropriations or authorizations. The Fed is funded by fees and the income generated by securities it owns. Its income exceeds its expenses, andit remits most ofits net income to the Treasury, where it is used to reduce the federal debt. The Fed's capital consists ofstockand a surplus. The surplus is capped at $6.825 billion by law. (Congress reduced the Fed's financial surplus as a budgetary pay for in P.L. 114-94, P.L. 115-123, and P.L. 115-174.) Private banks regulated by the Fed buy stockin the Fed to become memberbanks. Membership is mandatory fornational banks, but optional for s tate b anks. The s tockp ay s dividends of 6% forbanks with less than $10billion in assets and the lower of 6% or the 10-year Treas ury yield for banks with more than $10billion in assets. Stockholders choose two-thirds of the boards at theregional Fed banks. Responsibilities of the Federal Reserve The Fed's responsibilities fallinto four main categories: monetary policy, lender of last resort, prudential supervision ofcertainbanks and other fmancialfirms, and provision and oversight of payment systems. Monetary Policy. The Fed's primary monetary policy instrument is the federal funds rate (the overnight bank lending rate). The Fed influences interest rates to affect interest-sensitive spending on capital investment, consumer durables, and housing. Interestrates also indirectly influence the value of the dollar and, therefore, spending on exports and imports. The Fed reducesrates to stimulate economic activity and raises rates to slow activity. Monetary policy is considered abluntinstrument that cannotbe targeted to affect specific regions, certain industries, or the income distribution. Formerly, the Fed targeted the federal funds rate primarily through open marketoperations-the purchase and s ale of U.S. Treasury securities, mainly fromprimary 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 holdreserves. Since the 2007-2009 financial crisis, the Fed has primarily used a new method for targeting interestrates that relies on banks maintaining large reserves at the Fed and payingbanks intereston those reserves. In addition, monetary policy can involve foreign exchange operations, although these are rare. Open market and foreign exchange operations are conducted by the New York Fed per the FOMC's directives. The Fed influences growth in the money supply throughits controloverbank reserves andcurrencyin circulation. During the financial crisis, the Fed reduced the federal funds rate to zero and conducted large-scale asset purchases of Treas ury- and mortgage-backed s ecurities from2008 to 2014-known as quantitative easing (QE) that quintupled the size of its balance sheet. The Fed then began to normalize monetarypolicy. From2015 to 2018, the Fed initiated a series of increases in the federalfunds rate. From 2017 to 2019, the Fed modestly reduced the size of its balance sheet. However, the Fed began to cut rates and expand its balance sheet again in 2019, which remains much larger than its pre-crisis size. A large balance sheet has boosted Fed remittances to the Treasury in recent years. https:/!crs reports.congress.gc

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