> **Definition**
>
> The Federal Reserve System is a network of regional banks that acts as the central bank of the United States.

## What Is the Federal Reserve System (FRS)?

The Federal Reserve System (FRS) is the central bank of the United States. Often called the Fed, it is arguably the most influential financial institution in the world. It was founded to provide the country with a safe, flexible, and stable monetary and financial system. The Fed has a board of seven members and 12 Federal Reserve banks, each operating as a separate district with its own president.

There is a common misconception that the Federal Reserve System is privately owned. In fact, it combines public and private characteristics: The central governing board of the FRS is an agency of the federal government and reports to Congress. The Federal Reserve Banks that it oversees are set up like private corporations.

### Key Takeaways

*   The Federal Reserve System is the central bank and monetary authority of the United States.
*   The Fed works to provide the country with a safe, flexible, and stable monetary and financial system.
*   The Federal Reserve System is composed of a board of seven members, 12 regional Federal Reserve Banks, and the Federal Open Market Committee.
*   The Fed's main duties include conducting national [monetary policy](https://www.investopedia.com/fed-pivot-definition-6748840), supervising and regulating banks, maintaining financial stability, and providing banking services for banks.
*   There is a common misconception that the Federal Reserve System is privately owned; while its Board of Governors is a government agency, the regional Federal Reserve Banks are set up like private corporations.

## Understanding the Federal Reserve System (FRS)

A central bank is a financial institution given privileged control over the production and distribution of money and credit for a nation, union, or group of countries. In modern economies, the central bank is usually responsible for formulating monetary policy and regulating member banks. The Fed is composed of 12 regional Federal Reserve Banks that are each responsible for a specific geographic area of the U.S.

The Fed was established by the [Federal Reserve Act](https://www.investopedia.com/terms/f/1913-federal-reserve-act.asp), which was signed by President Woodrow Wilson on Dec. 23, 1913, in response to the financial panic of 1907. Before that, the U.S. was the only major financial power without a central bank. Its creation was precipitated by repeated financial panics that afflicted the U.S. economy over the previous century, leading to severe economic disruptions due to bank failures and business bankruptcies. A crisis in 1907 led to calls for an institution that would prevent panics and disruptions.

The Fed has broad power to act to ensure financial stability, and it is the primary regulator of banks that are members of the Federal Reserve System. It also serves as the lender of last resort to member institutions. Often referred to simply as the Fed, it has what is often called its "dual mandate" of ensuring price stability and maximum employment.

The system's 12 regional Federal Banks are based in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.

![Fed System Banks](https://www.investopedia.com/thmb/rfP-ISpD590jyvW---bhbcQkgjw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Clipboard01-5f81c3d8028b4eb8b1fc5f704d05ea75.jpg)

*Fed System Banks.*

## The Federal Reserve System's Mandate and Duties

The monetary policy [goals of the Federal Reserve](https://www.investopedia.com/articles/investing/100715/breaking-down-federal-reserves-dual-mandate.asp) are twofold: to foster economic conditions that achieve stable prices and maximum sustainable employment.

The Fed's duties can be further categorized into four general areas:

*   Implementing national monetary policy by influencing monetary and credit conditions in the U.S. economy to ensure maximum employment, stable prices, and moderate long-term interest rates.
*   Supervising and regulating banking institutions to ensure the safety of the U.S. banking and financial system and to protect consumers' credit rights.
*   Maintaining financial system stability and containing systemic risk.
*   Providing financial services, including a pivotal role in operating the national payments system, depository institutions, the U.S. government, and foreign official institutions.

![Image](https://www.investopedia.com/thmb/bnqEMTRzNfrZUEFAiJfyQBEMjUE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Understanding_the_Role_of_the_Fed_Jun_2020-01-02efe1c99128421195f2a3c68737d792.jpg)

**

## The Federal Reserve System's Organizational Structure

There are seven members of the Board of Governors. These individuals are nominated by the President and approved by the U.S. Senate. Each governor serves a maximum of 14 years. Their appointment is staggered by two years, which is intended to limit the political influences it might be subjected to when control of appointments shifts to different political parties during elections. The law also dictates that appointments represent all broad sectors of the U.S. economy.

At times, there may be an empty seat on the board, but as of May 2025, all board positions were occupied.

In addition to the governors of the Fed's board, each of the 12 regional banks has a president. Each of these banks is set up in a different Federal Reserve district.

## The Federal Reserve System's Independence

Central bank independence refers to the question of whether the overseers of monetary policy should be completely disconnected from the realm of government. Those who favor independence recognize the influence of politics in promoting monetary policy that can favor re-election in the near term but cause lasting economic damage down the road. Critics say that the central bank and government must tightly coordinate their policies and that central banks must have regulatory oversight.

The Fed is also considered independent because its decisions do not have to be ratified by the president or any other government official. However, it is still subject to congressional oversight and must work within the framework of the government's monetary and fiscal policy objectives.  

## The Federal Reserve System (FRS) vs. Federal Open Market Committee (FOMC)

The Federal Reserve System is composed of the Federal Reserve Board of Governors, the Federal Reserve Banks, the Federal Open Market Committee, and all the programs created by the Fed as a whole to accomplish its dual mandate.

The [Federal Open Market Committee](https://www.investopedia.com/terms/f/fomc.asp) (FOMC) is the Federal Reserve's main monetary policymaking body. It is responsible for open market operations, which is buying and selling government securities to influence the amount of money banks keep in reserve.

The FOMC includes the Board of Governors (or the Federal Reserve Board (FRB) as it's also called), the president of the Federal Reserve Bank of New York, and the presidents of four other regional Federal Reserve Banks who serve on a rotating basis.

The committee is responsible for monetary policy decisions, which are categorized into three areas: maximizing employment, stabilizing prices, and moderating long-term interest rates.

## Special Considerations

The Fed's main income source is interest charges on a range of U.S. government securities acquired through its [open market operations](https://www.investopedia.com/terms/o/openmarketoperations.asp) (OMO). Other income sources include interest on foreign currency investments, interest on loans to depository institutions, and fees for services, such as check clearing and fund transfers, provided to these institutions. After paying expenses, the Fed transfers the rest of its earnings to the U.S. Treasury.

The Federal Reserve payments system, commonly known as the Fedwire, moves trillions of dollars daily between banks throughout the U.S. Transactions are for same-day settlement. In the aftermath of the 2008 financial crisis, the Fed has paid increased attention to the risk created by the time lag between when payments are made early in the day and when they are settled and reconciled. The Fed is pressuring large financial institutions to improve real-time monitoring of payments and credit risk, which has been available only on an end-of-day basis.

The Fed developed a payment system called [FedNow](https://www.investopedia.com/what-is-fednow-7963716), designed to replace the traditional and slower settlement systems. FedNow was launched in July 2023.

## What Does the Federal Reserve System Do?

The Federal Reserve System is designed to regulate banks and financial institutions and to maintain the stability of the country's financial system.  

## What Power Does the President Have Over the Federal Reserve?

Generally, the president influences the Fed through appointments only. The president nominates the Federal Reserve Chair and the seven members of the Board of Governors. The Senate confirms these appointments, and they cannot easily be removed.

## What Would Happen If the Federal Reserve Didn't Exist?

Before the Federal Reserve existed, the financial system was in chaos. Without it, there would be no lenders of last resort and no governance over interest rates or money supply.

## How Does the Fed Set Interest Rates?

The Federal Reserve sets a rate range using three figures to adjust its rate range. The rate for its Overnight Reverse Repurchase (ON RREP) Agreement Facility sets the floor for the rate range. The Fed's discount rate, or the rate it charges banks for overnight loans, sets the top number for the range. The Fed uses its Interest on Reserve Balances (IORB) rate in conjunction with ON RREP to keep the effective federal funds rate in its target range. Open Market Operations are used to keep enough money in reserve so that the Fed's rates implement monetary policy.  

## The Bottom Line

The Federal Reserve System is the central banking system of the United States. The Fed uses the system and the tools it has to set interest rates and regulate the money supply to accomplish its dual mandate of price stability and maximum employment.

> **Article Sources**
>
> 1.  Federal Reserve Board. "[About the Fed](https://www.federalreserve.gov/aboutthefed.htm)."
>     
> 2.  Federal Reserve Board. "[Board Members](https://www.federalreserve.gov/aboutthefed/bios/board/default.htm)."
>     
> 3.  Federal Reserve Board. "[Structure of the Federal Reserve System](https://www.federalreserve.gov/aboutthefed/structure-federal-reserve-board.htm)."
>     
> 4.  United States Senate. "[The Senate Passes the Federal Reserve Act](https://www.senate.gov/artandhistory/history/minute/Senate_Passes_the_Federal_Reserve_Act.htm)."
>     
> 5.  Federal Reserve History. "[Federal Reserve Act Signed into Law](https://www.federalreservehistory.org/essays/federal-reserve-act-signed)."
>     
> 6.  Federal Reserve Board. "[The Fed Explained: What the Central Bank Does](https://www.federalreserve.gov/aboutthefed/files/the-fed-explained.pdf)."
>     
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>     
> 8.  Federal Reserve Board. "[What Economic Goals Does the Federal Reserve Seek to Achieve Through Its Monetary Policy?](https://www.federalreserve.gov/faqs/what-economic-goals-does-federal-reserve-seek-to-achieve-through-monetary-policy.htm)"
>     
> 9.  Federal Reserve Board. "[Who Are the Members of the Federal Reserve Board, and How Are They Selected?](https://www.federalreserve.gov/faqs/about_12591.htm)"
>     
> 10.  Federal Reserve System. “[Board of Governors Members, 1914-Present](https://www.federalreserve.gov/aboutthefed/bios/board/boardmembership.htm).”
>      
> 11.  Federal Reserve. "[Current Fed Leaders](https://www.federalreservehistory.org/people/current-fed-leaders)."
>      
> 12.  Federal Reserve Board. "[About the FOMC](https://www.federalreserve.gov/monetarypolicy/fomc.htm)."
>      
> 13.  Federal Reserve Board. "[Monetary Policy Principles and Practice](https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm)."
>      
> 14.  Federal Reserve Bank of Chicago. "[The Federal Reserve's Dual Mandate](https://www.chicagofed.org/research/dual-mandate/dual-mandate)."
>      
> 15.  Federal Reserve Board. "[What Does It Mean That the Federal Reserve Is "Independent Within the Government?](https://www.federalreserve.gov/faqs/about_12799.htm)"
>      
> 16.  Federal Reserve Board. "[Finance and Economics Discussion Series: Fedwire Funds Service: Payments, Balances, and Available Liquidity](https://www.federalreserve.gov/econres/feds/files/2021070pap.pdf)."
>      
> 17.  Federal Reserve Board. "[Fedwire Funds Services](https://www.federalreserve.gov/paymentsystems/fedfunds_about.htm)."
>      
> 18.  Federal Reserve Bank Services. "[About the FedNow Services](https://www.frbservices.org/financial-services/fednow/about.html)."
>      
> 19.  Federal Reserve Bank of St. Louis. "[How the Fed Implements Monetary Policy With Its Tools](https://www.stlouisfed.org/in-plain-english/the-fed-implements-monetary-policy)."