192 The Federal Reserve System and Central Banks
Learning Objectives
- Explain the structure and organization of the U.S. Federal Reserve
- Discuss how central banks impact monetary policy, promote financial stability, and provide banking services
Structure and Organization of the Federal Reserve
In order to help financial systems operate smoothly and to reduce the likelihood of financial crises, most modern nations have a central bank. The oldest central bank is the Bank of England. Other prominent central banks include the Bank of Japan, and the European Central Bank, which is the central bank for the member countries of the European monetary system. In the United States, the central bank is called the Federal Reserve—often abbreviated as “the Fed.” This section explains the organization of the U.S. Federal Reserve System and identifies the major responsibilities of a central bank.
The Federal Reserve, unlike most central banks, is semi-decentralized. At the national level, it is run by a Board of Governors, consisting of seven members appointed by the President of the United States and confirmed by the Senate. Appointments are for 14-year terms and they are arranged so that one term expires January 31 of every even-numbered year. The purpose of the long and staggered terms is to insulate the Board of Governors as much as possible from political pressure so that policy decisions can be made based only on their economic merits. Additionally, except when filling an unfinished term, each member only serves one term, further insulating decision-making from politics. Policy decisions of the Fed do not require congressional approval, and the President cannot ask for the resignation of a Federal Reserve Governor as the President can with cabinet positions.
Try It
The Federal Reserve is more than the Board of Governors. The Fed also includes 12 regional Federal Reserve banks, each of which is responsible for supporting the commercial banks and economy generally in its district. The Federal Reserve districts and the cities where their regional headquarters are located are shown in Figure 2. The commercial banks in each district elect a Board of Directors for each regional Federal Reserve bank, and that board chooses a president for each regional Federal Reserve district. Thus, the Federal Reserve System includes both federally and private-sector appointed leaders.
One member of the Fed’s Board of Governors is designated as the Chair. For example, from 1987 until early 2006, the Chair was Alan Greenspan. From 2006 until 2014, Ben Bernanke held the post. The next Chair, Janet Yellen, held the position from 2014 to 2018, and now Jerome Powell heads the organization.
WHO HAS THE MOST IMMEDIATE ECONOMIC POWER IN THE WORLD?
What individual can make financial market crash or soar just by making a public statement? It is not Bill Gates or Warren Buffett. It is not even the President of the United States.
The answer is the Chair of the Federal Reserve Board of G