The Federal Reserve: A Brief Overview

In modern economics, a country, or an economic community such as the European Union, usually has a central bank legally mandated to regulate the financial system under its jurisdiction. In the United States, the institution that exercises regulatory functions of the central bank is known as the Federal Reserve. Before the Federal Reserve was established in 1913, the federal government used selected commercial banks, whose shares it partly owned, to conduct some functions of a central bank. However, a situation prevailed where these banks were unable to address persistent financial crises that undermined the economy.

To resolve these serious macroeconomic challenges, the United States Congress established the Federal Reserve System in 1913 to give the nation a secure, more flexible and reliable monetary and financial system. Through the years, the Federal Reserve has assumed more functions, which are categorized into four main areas. Firstly, it manages monetary and financial policy to ensure complete employment and stability of prices. Secondly, it regulates and supervises banks to ensure reliability of financial systems and protection of customer credit rights. Thirdly, the Federal Reserve provides specific financial services to the federal government, financial institutions - both local and foreign - and the public. Its fourth function is to address systemic risks that may be detrimental to financial markets. A good example is when, in 2008, it intervened in the then global financial crisis by bailing out financial and other institutions to the tune of $700 billion.

For convenient provision of Federal Reserve services, a handful of states that geographically adjoin each other make up a district and are served by a Federal Reserve Bank. The Federal Reserve Act restricts the number of Federal Reserve Districts to between eight and twelve. Currently there are twelve Federal Reserve Districts, resulting into twelve Federal Reserve Banks.

The president of the United States has the legal mandate to nominate the board members of the Federal Reserve System. The Senate then approves or rejects their nomination. The law stipulates that membership of the Federal Reserve Board be representative of specific key sectors of the economy. These are finance, agriculture, industry and commerce. This inclusive variety at the board ensures that the interests of each of these vital economic areas are represented in economic policy-making, planning and implementation. The Board of Governors, as currently constituted, comprises seven members. The Chairman is Ben Bernanke while Janet Yellen is the Vice Chair.