Structure of the Federal Reserve SystemThe USA Fed consists of:
- Board of Governors
- Federal Reserve Banks
- Member banks
- Federal Open Market Committee
Board of Governors
The seven-member Board of Governors is the main governing body of the Federal Reserve System. Governors are appointed by the President of the United States and confirmed by the Senate for staggered, 14-year terms. In order to prevent the situation when a president appoints too many Governors their authority comes to an end by grade. The Chairman is appointed by the President for the period of 4 years.
The Board of Governors is charged with overseeing the 12 District Reserve Banks and with helping implement national monetary policy, sets the budget of Federal Reserve Bank, appoints the president and first vice-president of it.
Federal Reserve Banks
There are 12 regional Federal Reserve Banks (not to be confused with the “member banks”) with 25 branches, which serve as the operating arms of the system.
Each Federal Reserve Bank has a board of directors, whose 9 members are not the bank employees but work closely with their Reserve Bank president to provide grassroots economic information and input on management and monetary policy decisions. These boards are drawn from the general public and the banking community and oversee the activities of the organization. Member banks appoint class A and B directors and the Board of Governors elects C-class directors. Three A-class directors represent interests of banks; others represent interests of local manufacturers, consumers and non-commercial organizations.
Federal Reserve Banks gain their profit from securities, currency investments and market rates of deposit organizations. This profit is used to cover Fed expenses. Annually financial reports are inspected by certified public accountants and profit is sent to the Treasury.
Each member bank is a private bank (e.g., a privately owned corporation) that holds stock in one of the twelve regional Federal Reserve banks. The amount of stock each member bank must buy is set to be equal to 3% of its combined capital and surplus of stock in the Reserve Bank within its region of the Federal Reserve System. Holding stock in a Federal Reserve Bank is not, however, like owning publicly traded stock. The stock cannot be sold or traded. Member banks receive a fixed, 6% dividend annually on their stock, and they do not directly control the applicable Federal Reserve Bank as a result of owning this stock. They do, however, elect six of the nine members of Reserve banks’ boards of directors.
The advantage of the member bank status is that it gives one the right to receive loans from Federal Reserve Banks, use their services and get useful information.
Federal Open Market Committee
The Federal Open Market Committee (FOMC) is charged under United States law with overseeing the nation’s open market operations. It is the principal organ of United States national monetary policy. Open market operations are the buying and selling of United States Treasury securities. The Committee sets monetary policy by specifying the short-term objective for those operations, which is currently a target level for the federal funds rate (the rate that commercial banks charge between themselves for overnight loans). The FOMC meetings are carried out 8 times a year where its members discuss the current state of economic affairs and possible development of monetary and credit policy.