The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of financial panics (particularly the Panic of 1907) led to the desire for central control of the monetary system in order to alleviate financial crises. Although an instrument of the U.S. government, the Federal Reserve System considers itself "an independent central bank because its monetary policy decisions do not have to be approved by the president or by anyone else in the executive or legislative branches of government, it does not receive funding appropriated by Congress, and the terms of the members of the board of governors span multiple presidential and congressional terms." Over the years, events such as the Great Depression in the 1930s and the Great Recession during the 2000s have led to the expansion of the roles and responsibilities of the Federal Reserve System.
Congress established three key objectives for monetary policy in the Federal Reserve Act: maximizing employment, stabilizing prices, and moderating long-term interest rates. The first two objectives are sometimes referred to as the Federal Reserve's dual mandate. Its duties have expanded over the years, and include supervising and regulating banks, maintaining the stability of the financial system, and providing financial services to depository institutions, the U.S. government, and foreign official institutions. The Fed also conducts research into the economy and provides numerous publications, such as the Beige Book and the FRED database.
The Federal Reserve System is composed of several layers. It is governed by the presidentially appointed board of governors or Federal Reserve Board (FRB). Twelve regional Federal Reserve Banks, located in cities throughout the nation, regulate and oversee privately owned commercial banks. Nationally chartered commercial banks are required to hold stock in, and can elect some board members of, the Federal Reserve Bank of their region.
The Federal Open Market Committee (FOMC) sets monetary policy by adjusting the target for the federal funds rate, which generally influences market interest rates and, in turn, US economic activity via the monetary transmission mechanism. The FOMC consists of all seven members of the board of governors and the twelve regional Federal Reserve Bank presidents, though only five bank presidents vote at a time: the president of the New York Fed and four others who rotate through one-year voting terms. There are also various advisory councils. It has a structure unique among central banks, and is also unusual in that the United States Department of the Treasury, an entity outside of the central bank, prints the currency used.
The federal government sets the salaries of the board's seven governors, and it receives all the system's annual profits after dividends on member banks' capital investments are paid, and an account surplus is maintained. In 2015, the Federal Reserve earned a net income of $100.2 billion and transferred $97.7 billion to the U.S. Treasury, and 2020 earnings were approximately $88.6 billion with remittances to the U.S. Treasury of $86.9 billion.
The Federal Reserve has been criticized for its approach to managing inflation, perceived lack of transparency, and its role in economic downturns. Figures such as Milton Friedman and Ron Paul have argued that its actions, such as expansionary policies and bailouts, contribute to inflation, asset bubbles, and moral hazard. Critics have also noted that the shift from the gold standard to fiat currency has led to long-term inflation and financial instability, with some calling for the Fed's abolition or greater accountability through audits.
Purpose
Before the founding of the Federal Reserve System, the United States underwent several financial crises. A particularly severe crisis in 1907 led Congress to enact the Federal Reserve Act in 1913. The primary declared motivation for creating the Federal Reserve System was to address banking panics. Other stated purposes, are "to furnish an elastic currency, to afford means of rediscounting commercial paper, [and] to establish a more effective supervision of banking in the United States".
Today, the purposes of the Federal Reserve include the responsibilities to:
Address the problem of banking panics
Serve as the central bank for the United States
Balance private interests of banks and the centralized responsibility of government
Supervise and regulate banking institutions
Protect the credit rights of consumers
Conduct monetary policy by influencing market interest rates to achieve the goals of
Maximum employment
Stable prices, interpreted as an inflation rate of 2 percent per year on average
Moderate long-term interest rates
Maintain the stability of the financial system and contain systemic risk in financial markets
Provide financial services to depository institutions, the U.S. government, and foreign official institutions
Facilitate the exchange of payments among regions and the operation of the nation's payments system
Respond to local liquidity needs
Strengthen U.S. standing in the world economy
Fractional-reserve bank
Banks usually invest the majority of the funds received from depositors. However, banking institutions in the United States are required to hold reserves—amounts of currency and deposits in other banks—equal to a fraction of the amount of the bank's deposit liabilities owed to customers. This practice is called fractional-reserve banking. On rare occasions, too many of the bank's customers will withdraw their savings such that the bank cannot continue operating on its own; this is called a bank run. Bank runs can lead to a multitude of social and economic problems. The Federal Reserve System was designed as an attempt to prevent or minimize the occurrence of bank runs, and possibly act as a lender of last resort when a bank run occurs. Many economists, following Nobel laureate Milton Friedman, believe that the Federal Reserve inappropriately refused to lend money to small banks during the bank runs of 1929; Friedman argued that this contributed to the Great Depression.
Check clearing system
Before the establishment of the Federal Reserve, during times of economic uncertainty, some banks refused to clear checks from certain other banks, which led to large-scale bank failure in the early 20th-century. Hence, a national check-clearing system was created in the Federal Reserve System. The Federal Reserve can physically accept and transport cheques.
Lender of last resort
In the United States of America, the Federal Reserve serves as the lender of last resort to those institutions that cannot obtain credit elsewhere, institutions the collapse of which would have serious implications for the economy. It took over this role from the private sector clearing houses which operated during the Free Banking Era. The availability of liquidity is intended to prevent bank runs.
Fluctuations
Reserve Banks provide liquidity to banks to meet short-term needs stemming from seasonal fluctuations in deposits or unexpected withdrawals through its discount window and credit operations. Longer-term liquidity may also be provided in exceptional circumstances. The rate the Fed charges banks for these loans is called the discount rate (officially the primary credit rate). By making these loans, the Fed serves as a buffer against unexpected day-to-day fluctuations in reserve demand and supply. This contributes to the effective functioning of the banking system, alleviates pressure in the reserves market, and reduces the extent of unexpected movements in the interest rates. For example, on September 16, 2008, the Federal Reserve Board authorized an $85 billion loan to stave off the bankruptcy of international insurance giant American International Group (AIG).
Central bank
As the central bank of the United States, the Fed serves as a banker's bank and as the government's bank. As the banker's bank, it helps to assure the safety and efficiency of the payments system. As the government's bank or fiscal agent, the Fed processes a variety of financial transactions involving trillions of dollars. The U.S. Treasury keeps a checking account with the Federal Reserve, through which incoming federal tax deposits and outgoing government payments are handled. As part of this service relationship, the Fed sells and redeems U.S. government securities such as savings bonds and Treasury bills, notes and bonds. It also issues the nation's coin and paper currency. The U.S. Treasury, through its Bureau of the Mint and Bureau of Engraving and Printing, actually produces the nation's cash supply and, in effect, sells the paper currency to the Federal Reserve Banks at manufacturing cost, and the coins at face value. The Federal Reserve Banks then distribute it to other financial institutions in various ways. During the Fiscal Year 2020, the Bureau of Engraving and Printing delivered 57.95 billion notes at an average cost of 7.4 cents per note.
Federal funds
Federal funds, officially Federal Reserve Deposits, are the reserve balances that private banks keep at their local Federal Reserve Bank. These balances are the namesake reserves of the Federal Reserve System. The purpose of keeping funds at a Federal Reserve Bank is to have a mechanism for private banks to lend funds to one another. This market for funds plays an important role in the Federal Reserve System as it is the basis for its monetary policy work. Monetary policy is put into effect partly by influencing how much interest the private banks charge each other for the lending of these funds. Federal reserve accounts contain federal reserve credit, which can be converted into federal reserve notes.
Bank regulator
The Federal Reserve regulates private banks. The system was designed out of a compromise between the competing philosophies of privatization and government regulation. In 2006 Donald L. Kohn, vice chairman of the board of governors, summarized the history of this compromise:
Agrarian and progressive interests, led by William Jennings Bryan, favored a central bank under public, rather than banker, control. However, the vast majority of the nation's bankers, concerned about government intervention in the banking business, opposed a central bank structure directed by political appointees.
The legislation that Congress ultimately adopted in 1913 reflected a hard-fought battle to balance these two competing views and created the hybrid public-private, centralized-decentralized structure that we have today.
In the structure of the Federal Reserve System, private banks elect members of the board of directors at their regional Federal Reserve Bank while the members of the board of governors are selected by the president of the United States and confirmed by the United States Senate.
Government regulation and supervision
The Board of Governors of the Federal Reserve System has a number of supervisory and regulatory responsibilities in the U.S. banking system, but not complete responsibility. A general description of the types of regulation and supervision involved in the U.S. banking system is given by the Federal Reserve:
The Board also plays a major role in the supervision and regulation of the U.S. banking system. It has supervisory responsibilities for state-chartered banks that are members of the Federal Reserve System, bank holding companies (companies that control banks), the foreign activities of member banks, the U.S. activities of foreign banks, and Edge Act and "agreement corporations" (limited-purpose institutions that engage in a foreign banking business). The Board and, under delegated authority, the Federal Reserve Banks, supervise approximately 900 state member banks and 5,000 bank holding companies. Other federal agencies also serve as the primary federal supervisors of commercial banks; the Office of the Comptroller of the Currency supervises national banks, and the Federal Deposit Insurance Corporation supervises state banks that are not members of the Federal Reserve System.
Some regulations issued by the Board apply to the entire banking industry, whereas others apply only to member banks, that is, state banks that have chosen to join the Federal Reserve System and national banks, which by law must be members of the System. The Board also issues regulations to carry out major federal laws governing consumer credit protection, such as the Truth in Lending, Equal Credit Opportunity, and Home Mortgage Disclosure Acts. Many of these consumer protection regulations apply to various lenders outside the banking industry as well as to banks.
Members of the Board of Governors are in continual contact with other policy makers in government. They frequently testify before congressional committees on the economy, monetary policy, banking supervision and regulation, consumer credit protection, financial markets, and other matters.
The Board has regular contact with members of the President's Council of Economic Advisers and other key economic officials. The Chair also meets from time to time with the President of the United States and has regular meetings with the Secretary of the Treasury. The Chair has formal responsibilities in the international arena as well.The Federal Banking Agency Audit Act, enacted in 1978 as Public Law 95-320 and 31 U.S.C. section 714 establish that the board of governors of the Federal Reserve System and the Federal Reserve banks may be audited by the Government Accountability Office (GAO). The GAO has authority to audit check-processing, currency storage and shipments, and some regulatory and bank examination functions – though there are restrictions to what the GAO may audit.
Regulatory and oversight responsibilities
The board of directors of each Federal Reserve Bank District also has regulatory and supervisory responsibilities. If the board of directors of a district bank has judged that a member bank is performing or behaving poorly, it will report this to the board of governors. This policy is described in law:
Each Federal reserve bank shall keep itself informed of the general character and amount of the loans and investments of its member banks with a view to ascertaining whether undue use is being made of bank credit for the speculative carrying of or trading in securities, real estate, or commodities, or for any other purpose inconsistent with the maintenance of sound credit conditions; and, in determining whether to grant or refuse advances, rediscounts, or other credit accommodations, the Federal reserve bank shall give consideration to such information. The chairman of the Federal reserve bank shall report to the Board of Governors of the Federal Reserve System any such undue use of bank credit by any member bank, together with his recommendation. Whenever, in the judgment of the Board of Governors of the Federal Reserve System, any member bank is making such undue use of bank credit, the Board may, in its discretion, after reasonable notice and an opportunity for a hearing, suspend such bank from the use of the credit facilities of the Federal Reserve System and may terminate such suspension or may renew it from time to time.
National payments system
In the Depository Institutions Deregulation and Monetary Control Act of 1980, Congress reaffirmed that the Federal Reserve should promote an efficient nationwide payments system. The act subjects all depository institutions, not just member commercial banks, to reserve requirements and grants them equal access to Reserve Bank payment services. The twelve Federal Reserve Banks provide banking services to depository institutions and to the federal government. For depository institutions, they maintain accounts and provide various payment services, including collecting checks, electronically transferring funds, and distributing and receiving currency and coin. For the federal government, the Reserve Banks act as fiscal agents, paying Treasury checks; processing electronic payments; and issuing, transferring, and redeeming U.S. government securities.
The Federal Reserve plays a role in the nation's retail and wholesale payments systems by providing financial services to depository institutions. Retail payments are generally for relatively small-dollar amounts and often involve a depository institution's retail clients. The Reserve Banks' retail banking services include distributing currency and coin, collecting checks, electronically transferring funds through FedACH (the Federal Reserve's automated clearing house system), and beginning in 2023, facilitating instant payments using the FedNow service. The Reserve Banks' wholesale banking services include electronically transferring funds through the Fedwire Funds Service and transferring securities issued by the U.S. government, its agencies, and certain other entities through the Fedwire Securities Service. Unlike retail services, wholesale payments are generally for large-dollar amounts and often involve a depository institution's large corporate customers or counterparties.
Structure
The Federal Reserve System has a "unique structure that is both public and private" and is described as "independent within the government" rather than "independent of government". The System does not draw upon public funding, and derives its authority and purpose from the Federal Reserve Act, which was passed by Congress in 1913 and is subject to Congressional modification or repeal. The four main components of the Federal Reserve System are the board of governors, the Federal Open Market Committee, the twelve regional Federal Reserve Banks, and the member banks throughout the country.
Board of governors
The seven-member board of governors is a large federal agency that functions in business oversight by examining national banks. It is charged with the overseeing of the 12 District Reserve Banks and setting national monetary policy. It also supervises and regulates the U.S. banking system in general. Governors are appointed by the president of the United States and confirmed by the Senate for staggered 14-year terms. One term begins every two years, on February 1 of even-numbered years, and members serving a full term cannot be renominated for a second term. "[U]pon the expiration of their terms of office, members of the Board shall continue to serve until their successors are appointed and have qualified." The law provides for the removal of a member of the board by the president of the United States "for cause". The board is required to make an annual report of operations to the Speaker of the U.S. House of Representatives.
The chair and vice chair of the board of governors are appointed by the president of the United States from among the sitting governors. They both serve a four-year term and they can be renominated as many times as the president chooses, until their terms on the board of governors expire.
As of May 2026, Jerome Powell serves as chair, having held the position since 2018. On May 13, 2026, the United States Senate confirmed Kevin Warsh in a 54–45 vote to succeed Powell as the 17th chair of the Federal Reserve, with Powell's term expiring on May 15, 2026.
List of members of the board of governors
The current members of the board of governors are: