Federal Reserve System

The Federal Reserve System (FRS), often called simply the Fed, is the central bank of the United States and arguably the most powerful financial institution in the world. It was founded to provide the country with a safe, flexible, and stable monetary and financial system. A central bank is a financial institution given privileged control over the production and distribution of money and credit for a nation or a group of nations. In modern economies, the central bank is usually responsible for the formulation of monetary policy and the regulation of member banks. The Fed is composed of 12 regional Federal Reserve Banks that are each responsible for a specific geographic area of the US.

The Fed was established by the Federal Reserve Act, which was signed by President Woodrow Wilson on Dec. 23, 1913, in response to the financial panic of 1907. Before that, the US was the only major financial power without a central bank. Its creation was precipitated by repeated financial panics that afflicted the US economy over the previous century, leading to severe economic disruptions due to bank failures and business bankruptcies. A crisis in 1907 led to calls for an institution that would prevent panics and disruptions.

The Fed has broad power to act to ensure financial stability, and it is the primary regulator of banks that are members of the Federal Reserve System. It acts as the lender of last resort to member institutions that have no other place from which to borrow. Often referred to simply as the Fed, it has a mandate to ensure there is financial stability in the system. It is also the main regulator of the country’s financial institutions.

There are seven members of the Board of Governors, who are nominated by the president and approved by the US Senate. Each governor serves a maximum of 14 years, and each governor’s appointment is staggered by two years to limit the power of the president. In addition, the law dictates that appointments represent all broad sectors of the US economy. In addition, each of the 12 regional banks has its own president.

Central bank independence refers to the question of whether the overseers of monetary policy should be completely disconnected from the realm of government. Those favoring independence recognize the influence of politics in promoting monetary policy that can favor re-election in the near term but cause lasting economic damage down the road. Critics of independence say that the central bank and government must be tightly coordinated in their economic policy and that central banks must have regulatory oversight.

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