Federal Reserve System (Fed)

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Definition of The Federal Reserve System (Fed):

The Federal Reserve System, more commonly referred to as the Fed, is the central bank of the United States. It is responsible for establishing and implementing monetary policy aimed at maximizing employment while maintaining stable prices. It oversees the banking system and acts as the Federal Government’s bank.

Detailed Explanation:

Congress passed the Federal Reserve Act in 1913 following the panic of 1907. Prior to 1913 the United States did not have a central bank. (The Second National Bank’s charter expired in 1836.) Today, approximately 38 percent (3,000) of the nation’s commercial banks are members of the Federal Reserve System. All national banks must be members.

The Federal Reserve has four primary responsibilities: to guard the safety of the banking industry, to use monetary policy to manage the economy, to provide financial services to its member banks, and to act as fiscal agent for the US government. The roles and tools of the Fed are summarized in the table below. 

federal reserve system roles

The Federal Reserve System has 12 regional banks. The Board of Governors (also referred to as the Federal Reserve Board) oversees the Federal Reserve System and is responsible for establishing monetary policy. The regional banks carry out the policies of the Board of Governors. There are 7 members of the Board of Governors. Each is appointed by the President of the United States and approved by the Senate for 14 year terms. The longer terms are intended to make the positions less vulnerable to political pressure. The chairman and vice-chairman serve four years, but they can be reappointed. Janet Yellen currently serves as the Federal Reserve Chairwoman. She was appointed in 2014 and succeeded Ben Bernanke who served between 2006 and 2014.

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