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1 1 (June 14, 2022)

handle is hein.crs/govegqy0001 and id is 1 raw text is: Congressional Research Service intorming the legislative debate since 1914 Updated June 14, 2022 Introduction to Financial Services: The Federal Reserve Structure of the Federal Reserve The Federal Reserve Act of 1913 (12 U.S.C. 221 et seq.) created the Federal Reserve (Fed) as the nation's central bank. 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 each bank is headquartered and the area of each bank's jurisdiction. The board is composed of seven governors nominated by the President and confirmed by the Senate. The President selects (and the Senate confirms) a chair and two vice chairs from among the governors, one of whom is responsible for supervision. The governors serve nonrenewable 14-year terms, but the chair and vice chairs serve renewable four-year terms. Board members are chosen without regard to political affiliation. Regional bank presidents are chosen by their boards with the approval of the Board of Governors. Figure I. Federal Reserve Districts Source: Federal Reserve. In general, policy is formulated by the board and carried out by the regional banks. Monetary policy decisions, however, are made by the Federal Open Market Committee (FOMC), which is composed of the seven governors, the president of the New York Fed, and four other regional bank presidents. Representation for these four seats rotates among the other 11 regional banks. 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, and it remits most of its net income to the Treasury, where it is used to reduce the federal debt. The Fed's capital consists of stock and 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 stock in the Fed to become member banks. Membership is mandatory for federally chartered banks but optional for state-chartered banks. The stock pays dividends of 6% for banks with less than $10 billion in assets and the lower of 6% or the 10-year Treasury yield for banks with more than $10 billion in assets. Member banks choose two-thirds of the boards at the regional Fed banks. Responsibihities of the Federal Reserve The Fed's responsibilities fall into four main categories: monetary policy, lender of last resort, regulation of certain banks and other financial firms, and provision and oversight of certain 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. Interest rates also indirectly influence the value of the dollar and, therefore, spending on 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. 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 paying banks interest on those reserves. The Fed sets that interest rate to influence the federal funds rate. 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 through its control over bank reserves and currency in circulation, which are largely liabilities on its balance sheet. During the financial crisis, the Fed reduced the federal funds rate to zero and conducted large-scale asset purchases of Treasury- and mortgage-backed securities from 2008 to 2014-known as quantitative easing (QE) that increased the size of its balance sheet. Following a period when rates rose and the balance sheet shrunk, the Fed began to cut rates and expand its balance sheet again in 2019. At the onset of the pandemic, the Fed swiftly lowered interest rates to zero and increased its use of QE and repos to boost

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