Who Exactly Controls the United States Federal Reserve?

Oct 06, 2022 By Susan Kelly

For the United States, it would be the Federal Reserve. The global economy is tied to the fortunes of the United States. Because of its dominance, it is the most important player in the international economy. Not a corporation or government department. Its boss isn't chosen, which renders it questionable to voters and shareholders. Learn the inner workings of the Fed Reserve, who controls it, and how it is held responsible.

Who's In Charge Of The Federal Reserve?

The Federal Reserve was created as its own institution in 1913 according to the Federal Reserve Act. Woodrow Wilson as president preferred a central board selected by the govt, but Congress pushed for the Federal Reserve to have Twelve regional banks instead. The Fed now has both thanks to the deal.

Fed & Congress

Representatives of the Fed Reserve Board of Directors must be approved by the president & Congress, although their terms are spaced out to avoid overlap with those of public representatives. The current head of the Fed Reserve is Jerome Powell, who was appointed by the president. A nomination by the president requires confirmation by Congress. The Fed's activities must be reported to Congress by the chair.

The laws that regulate the Federal Reserve System may be changed by Congress. Dodd-Frank Limits Fed Powers Bailout funds provided by the Fed during the 2008 economic downturn were subject to examination by the Government Transparency Office. It obliged the Fed to provide the names of institutions that obtained TARP funds. Just like with Bear Stearns & AIG, the Fed must acquire U.s. Treasury permission before granting emergency funding.


Importantly, the Federal Reserve does not get its money from the government. Its investments are its primary source of revenue. During its open market activities, it purchased U.S. Treasury notes and now earns interest payments on those investments. Its holdings in foreign currencies provide income for the company. Banks there are paid to help commercial banks out. The processes of a clearinghouse, which involve the clearing of checks and the transfer of monies, are examples of this. Additionally, the Fed is compensated with interest for loans that it provides to partner banks. It pays its operating expenses out of these monies and sends any "revenue" to the U.S. Treasury.

Bank Members

The Twelve Fed Reserve banks are organised in a way that is not dissimilar from that of commercial banks. They act as a depository for cash, a check processing centre, and a lender to private banks operating under their regulatory jurisdiction. These financial institutions are part of the Fed Reserve System as well. Therefore, they need to meet reserve criteria. As compensation, they have the option of borrowing from one another at the Federal Funds level. As a last option, they may borrow at a reduced price via the Fed's discount window.

Commercial banks should therefore have stock in one of the Twelve Fed Reserve banks in order to participate in the Fed Reserve system. However, investing in the stock of a Fed Reserve bank is quite different from investing in the stock of a private corporation. The member banks have no voting power and they cannot be sold. Legally required dividends on these securities are 6 percent each year. But after covering their costs, the banks must give the money back to the U.S. government.

The Importance of the Fed's Neutrality and Why It Must Be Maintained

Chairmen of the Federal Reserve are often well-regarded economists in academia. Public policy, monetary policy, and finance are all areas in which they excel. They are appreciated for their knowledge in the field rather than for any other personal qualities, such as popularity or oratory ability. They are used to being in a setting where ideas are argued and assessed logically.

Fed Accountability

Though it operates independently, the Fed is nevertheless answerable to the people and to Congress. It is important for the Fed to be forthright about its plans and policies in order to set reasonable expectations. Likewise, it must make its justifications for whatever measures it takes very obvious. Reports are issued often and in great detail by the Fed. First, the head of the Federal Reserve and other members of the board regularly provide testimony before Congress. Second, the Federal Reserve provides Congress with a comprehensive Monetary Policy Report on a semiannual basis. After each meeting, the FOMC issues a statement. The minutes are also provided in full three weeks after the meeting. After five years, complete transcripts are made public.

How the Federal Reserve works

For the most part, the Federal Reserve's job has been to keep inflation under control. The system relies on a number of mechanisms to achieve this goal. It developed cutting-edge methods in the wake of the 2008 economic meltdown to forestall a downturn. Since the economic downturn, it has also promised to help with job creation and growth.

Tools for Monetary Policy

The Federal Reserve achieves its goals via the use of monetary policy instruments. "Expansionary monetary policy" refers to the practice of lowering interest rates. The result is a quicker expansion of the economy. Overheated economic growth leads to price increases or inflation. "Contractionary monetary policy" describes an increase in interest rates. The increased cost of borrowing has a chilling effect on economic expansion. That limits the flow of currency. Businesses reduce prices when demand decreases. The result is deflation.

In turn, this further reduces demand as customers postpone purchases as they await additional price drops. Can you explain how the Federal Reserve lowers interest rates? The rate at which the Fed funds target is set is reduced. When the Federal Reserve decreases a key interest rate, such as the prime rate, other banks often do the same. One of the Fed's other options is to reduce the discount rate, which is what banks pay to borrow money straight from the Fed.

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