Is the Federal Reserve Part of the Government?

November 27, 2018

By Laura J. Hopper

Exterior of Federal Reserve building in Washington, D.C.

The Federal Reserve System includes the Board of Governors, as well as 12 regional Reserve banks located in cities throughout the U.S.

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.

How the Federal Reserve System Is Organized

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.

VIDEO: St. Louis Fed economist David Wheelock explains the history and benefits of the Federal Reserve System’s structure.

Transcript

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 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.

Decentralized by Design: The 12 Regional 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. 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.

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. It includes 12 members:

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.

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

The framers of the Federal Reserve Act developed a central banking system that would broadly represent the public interest.

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. 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.

About the Author

Laura J. Hopper

Laura Hopper is the St. Louis Fed's employee ambassador coordinator. She works in the External Engagement and Corporate Communications Division.

Laura J. Hopper

Laura Hopper is the St. Louis Fed's employee ambassador coordinator. She works in the External Engagement and Corporate Communications Division.

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This blog explains everyday economics, consumer topics and the Fed. It also spotlights the people and programs that make the St. Louis Fed central to America’s economy. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.

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