What is the Federal Reserve?


Published: Sunday, January 15, 2006 at 6:01 a.m.
Last Modified: Saturday, January 14, 2006 at 10:25 p.m.
As the nation's central bank, the Federal Reserve governs the availability and cost of money and credit. It has dual and sometimes conflicting goals: taming inflation and maximizing U.S. employment.
The Fed's primary tool is that it sets "the federal funds rate," the overnight lending rate that banks charge each other for loans. That rate is set at eight scheduled meetings per year, every six weeks, of the Federal Open Markets Committee, the Fed's policy-making unit. The federal funds rate sets the bar for bank-loan rates to individuals and businesses.
The Fed chairman can set the fed funds rate between FOMC meetings, though this rarely happens.
The Federal Reserve Act of 1913 established 12 Federal Reserve Banks. They're creatures of the private banking system, financed by assessments on the banks. They process electronic payments, currency and checks, and help regulate banks.
A seven-member Board of Governors runs the Federal Reserve. Its members are appointed by the president and confirmed by the Senate to single 14-year terms, though few of them serve that long. Outside the military and federal courts, only the comptroller general - the chief auditor of the nation's finances - serves a longer appointed term, 15 years.
If appointed to fill a governor's unexpired term, as current Chairman Alan Greenspan was in August 1987, an appointee can fill out that term, then be appointed to a full 14-year term. Greenspan is in his 19th year as chairman. Only William McChesney Martin served longer, from April 1951 to January 1970. In its 92-year history, the Fed has had just 13 chairmen and 82 governors.
The Fed governors make up a majority on the 12-member FOMC. The other voting members are the president of the Federal Reserve Bank of New York and four presidents from the other Federal Reserve banks. Those four FOMC seats are one-year rotating terms.
To limit the influence of private bankers on the Fed's decisions, only one of the seven Fed governors can come from a Federal Reserve Bank. The others tend to be economists or other nonbank financial experts.
Transcripts of FOMC meetings for a given year are released together after a five-year lag. Brief summaries of FOMC discussions are made public three weeks after the body takes a policy action, but the full picture emerges only years later.

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