By Laura Hopper, Public Affairs Staff
The essence of the Federal Reserve’s existence is a frequent point of confusion, as evidenced by questions you may have heard surrounding, Who owns or controls the Fed?
The answer is, the Federal Reserve is not "owned" by anyone. With authority derived from Congress via the Federal Reserve Act of 1913, the Fed serves as a politically independent and nonpartisan entity within government, said St. Louis Fed economist David Wheelock. It’s accountable to the public and elected representatives in its mission to promote a stable financial system and healthy economy.
The Fed can best be described as independent within the government.
The System comprises a central governmental agency, the Federal Reserve Board of Governors, as well as 12 regional Reserve banks (and many branches) located in cities throughout the U.S.
The aspect of the structure that allows the Fed to serve the public while remaining independent lies in the difference between the regional Reserve banks and the Board of Governors.
The Board of Governors in Washington, D.C., is an independent agency of the federal government. It includes seven members whose appointments must by law yield a “fair representation of the financial, agricultural, industrial, and commercial interests and geographical divisions of the country,” the Board explains, and no two governors may come from the same Federal Reserve District. Members are nominated by the president and confirmed by the Senate.
The Board of Governors serves as a central governing board, reporting to and directly accountable to the Congress. The Board oversees the 12 Reserve banks.
The 12 regional Federal Reserve banks—including the St. Louis Fed—provide our central banking system with a decentralized operating structure. Here’s a bit more detail about them.
Voice of Main Street: The regional banks were set up intentionally to disperse, throughout the country, power that might otherwise be disproportionately centered in New York City or Washington, D.C. As such, these banks are designed to represent the voice of Main Street America. Economists and other staff work together to provide a regional perspective and expert knowledge about their district’s local economic conditions.
Setup and geography: By law, the Reserve banks were set up like private corporations. Each bank operates within its own geographic area—or “district”—of the U.S., and each is separately incorporated with its own board of directors. As described in our Making Sense of the Federal Reserve tutorial, six directors are elected by member commercial banks; three are appointed by the Board of Governors. Directors contribute local business experience, leadership and community involvement. They reflect the diverse interests of each Federal Reserve district.
Member banks: Commercial banks that are members of the Federal Reserve System hold stock in their district's Reserve bank. But owning Reserve bank stock is different from owning stock in a private company: Holding this stock does not carry with it the control and financial interest given to holders of common stock in for-profit organizations. The Reserve banks are not operated for profit. In fact, ownership of a certain amount of stock is, by law, a condition of membership in the Federal Reserve System.
Reserve bank presidents: Members of each Reserve bank’s board of directors select who will serve as the regional bank’s president, subject to approval by the Board of Governors. The St. Louis Fed’s president is James Bullard; in 2018 he marked 10 years serving in this role.
When you hear on the news that the Fed made a decision on interest rates, those stories refer to decisions by the Federal Open Market Committee (FOMC). The FOMC is the monetary policymaking body of the Fed. It includes 12 members:
The non-voting Reserve bank presidents also attend FOMC meetings and participate in discussions about the economy. In fact, everyone is given an equal voice at meetings to offer perspectives on appropriate monetary policy and to report on economic conditions in their districts.
Image courtesy of the Board of Governors
Just as the U.S. government includes checks and balances, the Federal Reserve is carefully designed to represent many viewpoints. The members of the Board of Governors and the regional Reserve bank presidents are a balance of political and nonpolitical appointees. Our central banking system features both a central governing body and a decentralized operating structure. Although parts of the System share some characteristics with private-sector entities, the Fed was established to serve the public interest. Wheelock explained that the Fed’s structure helps insulate the System from short-run political influences that might hamper the Fed’s ability to accomplish that.