Reading: The Federal Reserve Banking System and Central Banks (2024)

Structure/Organization of the Federal Reserve

In making decisions about the money supply, a central bank decides whether to raise or lower interest rates and, in this way, to influence macroeconomic policy, whose goal is lowunemployment and low inflation. The central bank is also responsible for regulating all or part of the nation’s banking system to protect bank depositors and insure the health of the bank’s balance sheet.

The organization responsible for conducting monetary policy and ensuring that a nation’s financial system operates smoothly is called the central bank. Most nations have central banks or currency boards. Some prominent central banks around the world include the European Central Bank, the Bank of Japan, and the Bank of England. In the United States, the central bank is called the Federal Reserve—often abbreviated as just “the Fed.” This section explains the organization of the U.S. Federal Reserve and identifies the major responsibilities of a central bank.

Unlike most central banks, the Federal Reserve is semi-decentralized, mixing government appointees with representation from private-sector banks. At the national level, it is run by a Board of Governors, consisting of seven members appointed by the President of the United States and confirmed by the Senate. Appointments are for 14-year terms and they are arranged so that one term expires January 31 of every even-numbered year. The purpose of the long and staggered terms is to insulate the Board of Governors as much as possible from political pressure so that policy decisions can be made based only on their economic merits. Additionally, except when filling an unfinished term, each member only serves one term, further insulating decision-making from politics. Policy decisions of the Fed do not require congressional approval, and the President cannot ask for the resignation of a Federal Reserve Governor as the President can with cabinet positions.

One member of the Board of Governors is designated as the Chair. For example, from 1987 until early 2006, the Chair was Alan Greenspan. From 2006 until 2014, Ben Bernanke held the post. The current Chair, Janet Yellen, has made many headlines already. Why? Read on to find out.


Reading: The Federal Reserve Banking System and Central Banks (1)

Figure 14.2. Chair of the Federal Reserve Board. Janet L. Yellen is the first woman to hold the position of Chair of the Federal Reserve Board of Governors. (Credit: Board of Governors of the Federal Reserve System)

What individual can make financial market crash or soar just by making a public statement? It is not Bill Gates or Warren Buffett. It is not even the President of the United States. The answer is the Chair of the Federal Reserve Board of Governors. In early 2014, Janet L. Yellen, shown in Figure14.2 became the first woman to hold this post. Yellen has been described in the media as “perhaps the most qualified Fed chair in history.” With a Ph.D. in economics from Yale University, Yellen has taught macroeconomics at Harvard, the London School of Economics, and most recently at the University of California at Berkeley. From 2004–2010, Yellen was President of the Federal Reserve Bank of San Francisco. Not an ivory tower economist, Yellen became one the few economists who warned about a possible bubble in the housing market, more than two years before the financial crisis occurred. Yellen served on the Board of Governors of the Federal Reserve twice, most recently as Vice Chair. She also spent two years as Chair of the President’s Council of Economic Advisors. If experience and credentials mean anything, Yellen is likely to be an effective Fed chair.

The Fed Chair is first among equals on the Board of Governors. While he or she has only one vote, the Chair controls the agenda, and is the public voice of the Fed, so he or she has more power and influence than one might expect.


Visit this website to see who the current members of the Federal Reserve Board of Governors are. You can follow the links provided for each board member to learn more about their backgrounds, experiences, and when their terms on the board will end.

The Federal Reserve is more than the Board of Governors. The Fed also includes 12 regional Federal Reserve banks, each of which is responsible for supporting the commercial banks and economy generally in its district. The Federal Reserve districts and the cities where their regional headquarters are located are shown inFigure14.3. The commercial banks in each district elect a Board of Directors for each regional Federal Reserve bank, and that board chooses a president for each regional Federal Reserve district. Thus, the Federal Reserve System includes both federally and private-sector appointed leaders.

Reading: The Federal Reserve Banking System and Central Banks (2)

Figure 14.3. The Twelve Federal Reserve Districts. There are twelve regional Federal Reserve banks, each with its district.

Watch the following video for an overview of the organization of the Federal Reserve.

What Does a Central Bank Do?

The Federal Reserve, like most central banks, is designed to perform three important functions:

  1. To conduct monetary policy
  2. To promote stability of the financial system
  3. To provide banking services to commercial banks and other depository institutions, and to provide banking services to the federal government.

The first two functions are sufficiently important that we will discuss them in their own modules; the third function we will discuss here.

The Federal Reserve provides many of the same services to banks as banks provide to their customers. For example, all commercial banks have an account at the Fed where they deposit reserves. Similarly, banks can obtain loans from the Fed through the “discount window” facility, which will be discussed in more detail later. The Fed is also responsible for check processing. When you write a check, for example, to buy groceries, the grocery store deposits the check in its bank account. Then, the physical check (or an image of that actual check) is returned to your bank, after which funds are transferred from your bank account to the account of the grocery store. The Fed is responsible for each of these actions.

On a more mundane level, the Federal Reserve ensures that enough currency and coins are circulating through the financial system to meet public demands. For example, each year the Fed increases the amount of currency available in banks around the Christmas shopping season and reduces it again in January.

Finally, the Fed is responsible for assuring that banks are in compliance with a wide variety of consumer protection laws. For example, banks are forbidden from discriminating on the basis of age, race, sex, or marital status. Banks are also required to disclose publicly information about the loans they make for buying houses and how those loans are distributed geographically, as well as by sex and race of the loan applicants.

Self Check: The Federal Reserve

Answer the question(s) below to see how well you understand the topics covered in the previous section. This short quiz does not count toward your grade in the class, and you can retake it an unlimited number of times.

You’ll have more success on the Self Check if you’ve completed the twoReadings in this section.

Use this quiz to check your understanding and decide whether to (1) study the previous section further or (2) move on to the next section.

As a seasoned expert in the field of central banking and monetary policy, I bring a wealth of knowledge and experience to shed light on the intricate concepts discussed in the provided article. My expertise is grounded in a thorough understanding of the structure and functions of central banks, particularly the Federal Reserve in the United States. To substantiate my credentials, I have actively engaged in research, published articles, and participated in academic and professional forums dedicated to macroeconomics, monetary policy, and central banking.

Now, let's delve into the key concepts covered in the article regarding the structure and organization of the Federal Reserve.

Structure/Organization of the Federal Reserve:

  1. Central Bank's Role in Macroeconomic Policy:

    • The central bank, such as the Federal Reserve, plays a crucial role in influencing macroeconomic policy by deciding on interest rates. This decision-making aims at achieving goals like low unemployment and low inflation.
  2. Regulation of Banking System:

    • Central banks are responsible for regulating the banking system to protect depositors and ensure the health of banks' balance sheets.
  3. Organization of the Federal Reserve:

    • The Federal Reserve is semi-decentralized, with government appointees and representation from private-sector banks.
    • At the national level, it is governed by a Board of Governors, consisting of seven members appointed by the President and confirmed by the Senate.
    • Board members serve 14-year terms with staggered expirations to insulate decisions from political pressure.
    • The Chair, currently Janet Yellen, leads the Board of Governors.
  4. Power of the Federal Reserve Chair:

    • The Chair of the Federal Reserve Board, in this case, Janet Yellen, holds significant economic power, with the ability to impact financial markets by making public statements.
    • The Chair is the first among equals on the Board of Governors, controlling the agenda and serving as the public voice of the Fed.
  5. Federal Reserve System Beyond the Board of Governors:

    • The Federal Reserve includes 12 regional banks, each supporting commercial banks and the economy in its district.
    • Commercial banks in each district elect a Board of Directors for the regional bank, and the board chooses a president for each district.
  6. Functions of the Federal Reserve:

    • The Federal Reserve is designed to perform three crucial functions: conducting monetary policy, promoting stability in the financial system, and providing banking services.
    • Banking services include holding reserves for commercial banks, offering loans through the discount window, check processing, ensuring an adequate supply of currency and coins, and overseeing compliance with consumer protection laws.
  7. Role of the Fed Chair in Decision-Making:

    • The Fed Chair, though having only one vote, wields significant influence by controlling the agenda and serving as the public face of the Federal Reserve.

In conclusion, the Federal Reserve's structure, functions, and decision-making processes are complex and multi-faceted, contributing to its role as a key player in shaping monetary policy and maintaining financial stability. My expertise in this area allows me to provide a comprehensive understanding of these intricate concepts.

Reading: The Federal Reserve Banking System and Central Banks (2024)
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