How is the Federal Reserve is Organized?

The Federal Reserve is one of the most important institutions in the US, however it is by far one of the least understood. This article will focus on explaining how the Federal Reserve System is organized.

Structure of the Federal Reserve (from the bottom up)
There is a great deal of confusion as to who actually runs the Federal Reserve System. The reality is that the Federal Reserve is both a private and public as well as centralized and decentralized. While the Federal Reserve can act independently from the rest of the government, it is not completely outside the influence of government. If we review the organization of the Federal Reserve System from a bottom up fashion, things will be made clear. At least as clear as any Federal bureaucracy can be.

Member banks
Member banks are private banks (like Bank of America or US Bank) that hold stock in one of the 12 regional Reserve Banks. All nationally chartered banks must hold stock in the Federal Reserve while state chartered banks may chose to hold stock or not if the meet certain requirements. This stock isn’t like stock on Wall Street. It cannot be sold or traded like normal stock and member banks receive fixed 6% dividends annually on this stock. Member banks have the privlidge of electing several (but not all) of the officers that serve on the board of their regional Reserve Bank.

Reserve Banks
There are 12 regional Reserve Banks, which serve as the operating arm of the Federal Reserve and are responsible for supervising and regulating member banks. They are also responsible for distributing (not printing) currency and coin to member banks. Each Reserve Bank has a nine-member board of directors. Member banks elect six of those members. The Board of Governors appoints the other three.

Federal Open Market Committee (FOMC)
The FOMC concerns itself with what are called open market operations, which is a fancy way of saying the buying and selling of US Treasury securities. This group is composed of five individuals from the Board of Governors, the Chairman of the Reserve Bank of New York and presidents of 4 other Reserve Banks. With the exception of the member from the Reserve Bank of New York, all other members from Reserve Banks serve on a rotating basis.

Board of Governors
The Board of Governors is composed of seven members (including a chair and vice chair) who are appointed by the US President and confirmed by the US Senate. Each of these seven members is appointed to a term of 14 years. Once that term has expired, they cannot be reappointed. The 14-year terms are also staggered with a new one opening up every even numbered year. The purpose of the 14-year term is to ensure that the Federal Reserve operates outside the influence of day-to-day politics. One of the seven members serves as the Chairman of the Fed and another serves as Vice Chairman. The US president appoints one member of the board as Chairman and one as Vice Chairman. The two chair positions are held in four-year terms.

Members from the Board of Governors are in continual contact with policy makers and often testify before Congress. They also participate as delegates to various national economic institutions (the FDIC) and international ones as well (IMF, G7).

US Congress and the President
As mentioned before, the President appoints and the Senate confirms members of the Board of Governors. Reserve operates on its own earnings, which protects it from being tossed around like a political football as the Federal Government attempts to make its budget each year. The Federal Reserve is held responsible to Congress and Congress has the power to regulate both its activities and responsibilities by statute. In other words, if Congress doesn’t like what the Federal Reserve is doing, it can change it by passing new laws.

References:
The Federal Reserve System Purposes and Functions, The Federal Reserve

Federal ReserveSystem, Wikipedia