Overview: Federal Reserve System

The Federal Reserve System (the Fed) is the central bank of the United States. It was created by the Congress to provide the USA with a “safer, more flexible, and more stable monetary and financial system.” It is an independent entity within the government. However, it remains subject to oversight by the Congress, which often reviews its activities and can alter its responsibilities by statute.


The Federal Reserve Act was initially enacted in 1913. The Fed comprises of the Board of Governors in Washington and twelve Federal Reserve Banks situated throughout the country.

The Federal Reserve was enacted due to the failure of the national banks to provide effective funding which led to an increased likelihood of financial panics. A severe crisis in 1907 led to Congress establishing the National Monetary Commission, which made proposals to create an institution that would prevent such financial disruptions.

Federal Open Market Committee

The Federal Open Market Committee (FOMC) is a body established by the Federal Reserve Act to govern the system’s operations in the market for US government securities and certain other instruments. It is the principal source on US national monetary policy. The committee is comprised of twelve voting members, including all seven board members, the president of the Federal Reserve Bank of New York, and four of the eleven other Reserve Bank presidents, who serve in rotation.

In addition, the Directors of each Reserve Bank contribute to monetary policy by making recommendations about the appropriate discount rate, which are subject to final approval by the Governors.

Role of the Federal Reserve System

The Fed’s duties broadly fall into four general areas:

-          Conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates (known as the Fed’s dual mandate).

-          Supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers.

-          Maintaining the stability of the financial system and containing systematic risk that may arise in financial markets.

-          Providing financial services to depository institutions, the US government, and foreign official institutions, including playing a major role in operating the nation’s payments system.

The Federal Reserve Act states that the Board of Governors and the Federal Open Market Committee (FOMC) should seek “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

Consumer Protection

In regard to consumer protection, the Federal Reserve’s responsibilities include:

-          Writing and interpreting regulations to carry out many of the major consumer protection laws.

-          Reviewing bank compliance with the regulations.

-          Investigating complaints from the public about state member banks’ compliance with consumer protection laws.

-          Addressing issues of state and federal jurisdiction.

-          Testifying before Congress on consumer protection issues.

-          Conducting community development activities.

International Role

The activities of the Federal Reserve and the international economy influence each other. Therefore, when deciding on the appropriate monetary policy for achieving basic economic goals, the Board of Governors and the FOMC consider the record of US international transactions, movements in foreign exchange rates, and other international economic developments.

Supervisory Role

The Federal Reserve shares supervisory and regulatory responsibilities for domestic banking institutions with the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation (FDIC), and the OTS.

The primary supervisor of a domestic banking institution is generally determined by the type of institution that it is and the governmental authority that granted it permission to commence business. Banks that are chartered by a state government are referred to as state banks; banks that are chartered by the OCC are referred to as national banks.


As an independent entity within government the Fed does not receive any funding from Congress. The income of the Fed is primarily from the interest on U.S. government securities that it trades through open market operations. Other sources of income include interest on foreign currency investments, fees received for services, and interest on loans to depository institutions.

After paying its expenses, the Federal Reserve transfers any surplus earnings over to the US Treasury.


This article provides a brief overview of the Federal Reserve System, which represents the central bank of the United States. The Federal Reserve was enacted due to the failure of the national banks to provide effective funding which led to an increased likelihood of financial panics. The article takes a look at the roles and responsibilities of the Federal Reserve.

CIPP Exam Preparation

In preparation for the Certified Information Privacy Professional/United States (CIPP/US) exam,  a privacy professional should be comfortable with topics related to this post, including:

  • Federal Reserve Board (I.A.d.v.1.)

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