What is the Federal Reserve?

The Federal Reserve, often called the Fed, is the central banking system of the United States. It was created by the Federal Reserve Act of 1913 in response to a series of financial panics, particularly the Panic of 1907, that demonstrated the need for a central authority to stabilize the banking system and the broader economy. The Federal Reserve has three main functions: setting monetary policy to promote maximum employment and stable prices; supervising and regulating banks to ensure the safety and soundness of the financial system; and providing financial services to the U.S. government and the banking industry, including operating the nation's payment systems.

The Federal Reserve has a unique structure that combines public oversight with private elements. At the top is the Board of Governors, a federal agency based in Washington, D.C., with seven members appointed by the President and confirmed by the Senate to 14-year staggered terms. The Chair and Vice Chair of the Board are designated by the President from among the sitting governors and confirmed by the Senate to four-year terms. The current Federal Reserve Chair is Jerome Powell, who was first appointed by President Trump in 2018 and reappointed by President Biden in 2022.

Below the Board are 12 regional Federal Reserve Banks located in major cities including New York, Chicago, San Francisco, and Atlanta. Each regional bank serves a specific geographic district and has its own president and board of directors. The presidents of the regional banks rotate participation in monetary policy decisions through the Federal Open Market Committee.

The Federal Open Market Committee, or FOMC, is the body that sets U.S. monetary policy. It is made up of the seven members of the Board of Governors, the president of the New York Federal Reserve Bank (always a voting member), and four of the other regional bank presidents who rotate annually. The FOMC meets eight times a year to set the federal funds rate target and decide on other monetary policy actions.

Federal Reserve decisions affect interest rates throughout the economy, including mortgages, car loans, business loans, and savings accounts. The Fed has been particularly active in recent years, raising interest rates aggressively in 2022 and 2023 to combat inflation that reached 40-year highs, then beginning to lower rates in 2024 as inflation cooled. The Federal Reserve also acts as lender of last resort during financial crises and has implemented emergency lending programs during the 2008 financial crisis and the COVID-19 pandemic.