Understanding the Federal Reserve’s Structure
The structure of the Federal Reserve is multifaceted, but the idea behind it is simple: to ensure the economic experiences of households, communities and businesses across the nation constantly inform the Fed’s policies, actions and decision-making.
You might say the central bank’s structure was decentralized by design.
With authority derived from Congress in the Federal Reserve Act of 1913, the Fed serves as a politically independent and nonpartisan entity, explains St. Louis Fed economist David Wheelock. The Fed can best be described as independent within the government. It’s accountable to the public and elected representatives in its effort to promote a stable financial system and healthy economy through five core functions:
- Conducting monetary policy
- Promoting financial system stability
- Supervising and regulating financial institutions and activities
- Fostering payment and settlement system safety and efficiency
- Promoting consumer protection and community development
How the Federal Reserve System Is Organized
The Federal Reserve System comprises a central governmental agency—the Federal Reserve Board of Governors—and 12 regional Reserve banks (and many branches) located in cities throughout the U.S. The third main part is the Federal Open Market Committee, or FOMC.
The Federal Reserve Bank of St. Louis is part of this system working to promote stable prices, safe banking, secure payments, and more. Wheelock explains the Fed’s history in this video.
VIDEO: Learn the history and benefits of the Federal Reserve System’s structure.
Narrator: In the early part of the 20th century, a series of banking panics in the United States emphasized the need for greater control of our banking system. This ultimately led to the passage of the Federal Reserve Act in 1913.
David Wheelock: So, there was a famous meeting of Jekyll Island, Georgia, Nelson Aldrich, a key senator in the Republican Party at that time, and some leading bankers. And they decided what the United States needed was some form of a central bank to provide a way of dealing with these sort of recurring panics that occurred. There was one school of thought, which argued that we want an organization that’s, basically, a bank run and controlled for by the major banks, the Wall Street guys. On the other hand, there was a group that said, “No, we need really another government agency to oversee the banking system. It should be politicians or political control, not banker control.”
And then there was another aspect of this, which is, “Should we have a central bank, like the Bank of England, which is just in London? Do we want something like that in the U.S., which is either in New York or Washington? Or do we want more of a regional system, where we have banks scattered throughout the country?”
Narrator: The Federal Reserve System that emerged was a political compromise between these public and private concerns. On the private side, a decentralized system of federal banks was created, not unlike private corporations’, to meet the individual banking needs of each region. On the public side is the Board of Governors in Washington, D.C., which provides general oversight of the Fed System and is itself subject to congressional oversight.
Wheelock: The Federal Reserve Act specifies that between eight and 12 Federal Reserve banks will be established throughout the country. The act also created a Reserve bank organizing committee, and this organizing committee went around the country and visited various cities. They studied the regional trading patterns.
You know, St. Louis trades with other cities in Arkansas, and along the Mississippi River, and so forth, where Chicago is more the Upper Midwest. They look at those patterns. They look at where local commercial banks would themselves have correspondent relationships. St. Louis city banks took in deposits from banks in Louisville, Little Rock, and so forth. Not so many from Des Moines, for example. So Des Moines ends up in the Chicago Fed’s District, whereas Louisville ends up in the St. Louis Fed’s District. So they looked at a variety of economic conditions and trading relationships to decide exactly which cities should be where the Federal Reserve banks are located.
A Central Governing Entity: The Board of Governors
The Board of Governors in Washington, D.C., is an independent agency in the federal government. It includes seven members whose appointments must—by law—result in a “fair representation of the financial, agricultural, industrial, and commercial interests and geographical divisions of the country.” No two governors may come from the same Federal Reserve district. Members are nominated by the president of the United States and confirmed by the U.S. Senate.
The Board of Governors serves as a central governing board, reporting to and directly accountable to Congress. The Board oversees the 12 Reserve banks.
Decentralized by Design: The 12 Regional Reserve Banks
The 12 regional Federal Reserve banks—including the St. Louis Fed—provide America’s central banking system with a decentralized operating structure. Here’s a bit more detail about them.
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. 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.
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 Alberto Musalem. He frequently engages with stakeholders throughout the Eighth Federal Reserve District and elsewhere to better understand various perspectives on the economy.
The Federal Reserve System works to promote stable prices, safe banking, secure payments, and more.
Regional economies: The regional banks were set up to disperse, throughout the country, power that might otherwise be disproportionately centered in New York City or Washington, D.C. So, each Reserve bank represents the voices of households, communities and businesses across the part of the country it serves. Economists and other Reserve bank staff also work together to provide a regional perspective and expert knowledge about their district’s local economic conditions.
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.
How Many Views Come Together to Shape Monetary Policy
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. Its 12 voting members include:
- The seven members of the Board of Governors. The Board chair also serves as chair of the FOMC; the current chairman is Jerome Powell.
- Five of the regional Reserve bank presidents. The New York Fed president is a permanent FOMC member, while the presidents of the other Reserve banks fill the remaining four voting positions on a rotating basis.
At FOMC meetings, each of the Reserve bank presidents—whether they are voting members or not—and each of the governors are given an equal voice to offer perspectives on appropriate monetary policy and the economy. In addition, the nonvoting Reserve bank presidents report on economic conditions in their districts like the voting Reserve bank presidents do.
The FOMC, Board of Governors and Reserve Banks
The framers of the Federal Reserve Act developed a central banking system that would broadly represent the public interest. Image courtesy of the Board of Governors.
A Carefully Designed System
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.
Editor’s Note: This blog post, originally published Nov. 27, 2018, has been updated to include additional information about the Federal Reserve’s structure.
This blog explains everyday economics and the Fed, while also spotlighting St. Louis Fed people and programs. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.
Email Us