# Federal Reserve System (FRS): Functions and History

![United States Federal Reserve building, Washington DC, USA](https://www.investopedia.com/thmb/nQSZiY7yF-yFP5roVJ5TtuiNZXM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/united-states-federal-reserve-building--washington-dc--usa-699686820-4fe8a5acea0b451b8998d683dfcd87db.jpg)

**

> **Definition**
>
> Established in 1913, the Federal Reserve System is the central bank of the U.S. and plays a key role in maintaining a stable economy.

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

The Federal Reserve System (FRS) is the central bank of the U.S. It is composed of a central governmental agency in Washington, D.C., the Board of Governors, and 12 regional Federal Reserve Banks in major cities throughout the U.S. The Fed's central role is implementing monetary policy to influence the economy and financial system.

### Key Takeaways

*   The Federal Reserve System is the central banking system of the United States.
*   Its key functions include implementing monetary policy and regulating banks, among other things.
*   The Federal Reserve payments system, known as the Fedwire, moves trillions of dollars daily between banks.
*   The Federal Open Market Committee (FOMC) is the Fed's monetary policy-making body and manages the country's money supply.

## Understanding the Federal Reserve System (FRS)

The Federal Reserve System is the central banking system of the United States and a major force in the country's economy and banking industry. The bank is headed by a Chairperson, who is one of seven board members. These individuals are nominated by the president and confirmed by the Senate.

The Fed performs five general functions:

*   Conducting the nation's [monetary policy](https://www.investopedia.com/terms/m/monetarypolicy.asp)
*   Promotes the stability of the financial system and works to minimize risks within it
*   Promotes financial institution safety and soundness and monitors their impact
*   Providing financial services to banks and the U.S. government
*   Promoting consumer protection through supervision, regulatory policy, research, and analysis  
    

The Fed also operates three wholesale payment systems: the Fedwire Funds Service, the Fedwire Securities Service, and the National Settlement Service.

The Fed has been granted broad power to ensure financial stability, and it is the primary regulator of banks that are members of the Federal Reserve System. It also acts as the lender of last resort for member institutions that have no other place to borrow.

> **Fast Fact**
>
> Jerome Powell was sworn in as Fed chair on Feb. 5, 2018, for a four-year term. He was reappointed for a second four-year term on May 23, 2022.

## Fed Payments

The Fed uses two payment systems: Fedwire and [FedNow](https://www.investopedia.com/what-is-fednow-7963716). The FedNow service allows for instant payments. As the Fed describes, "payments that can be sent and received within seconds at any time of the day, on any day of the year, such that the receiver can use the funds almost instantly."

Fedwire is a payment service for financial institutions that hold an account with the Fed. According to the Fed, it is a "real-time gross settlement system that enables participants to initiate funds transfers that are immediate, final, and irrevocable once processed." It is used to make large-value, time-critical payments.

## History of the Federal Reserve System

The Fed was established by the Federal Reserve Act, 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 economic power without a central bank.

The following are some key highlights in the Fed's history:

*   When the Federal Reserve Act was established, it required commercial banks to hold reserves at their local Reserve Bank. Banks were able to borrow additional funds if and when needed by approaching the [discount window](https://www.investopedia.com/terms/d/discountwindow.asp). The discount window is the lending facility that helps commercial banks meet their short-term liquidity needs.
*   The Fed underwent several changes in its early years. For instance, its workings were changed after the Great Depression. The Banking Acts of 1933 and 1935 gave the Fed's board more power (shifted away from the 12 Reserve Banks).
*   The Federal Reserve Reform Act, passed in 1977, required the central bank to report to Congress regarding progress on its goal of achieving maximum employment and reaching its inflationary targets.  
    

> **Important**
>
> The Federal Reserve attempts to reach a target rate of inflation of 2% over the long run.

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

The Federal Open Market Committee (FOMC) is the Fed's monetary policy-making body and manages the country's money supply. It is made up of the Fed's board of governors, the president of the New York Fed, and four of the remaining 11 regional Fed presidents, who serve one-year terms on a rotating basis. The FOMC meets eight times a year and additionally on an as-needed basis to discuss the outlook for the national economy and review options for its monetary policy.

The FOMC adjusts the target range for the [federal funds rate](https://www.investopedia.com/terms/f/federalfundsrate.asp), which controls short-term interest rates, at its meetings based on its view of the economy's strength. When it wants to stimulate the economy, it reduces the target range. Conversely, it raises the target range to slow the economy.

Here's a history of how the target rate has moved in recent years:

*   The target rate was lowered to 0.25% in response to the recession in 2008 and stayed there for seven years.
*   On Dec. 16, 2015, the Fed raised the target rate range to 0.25% to 0.5%—the first rate hike in almost 10 years.
*   The FOMC increased the rate range to 2.0% to 2.25% on July 31, 2019.
*   The Fed drastically reduced the range to 0% to 0.25% on March 16, 2020, citing issues stemming from the COVID-19 pandemic.
*   The FOMC began increasing rates in the latter part of 2022 and continued to do so through 2023, reaching a range of 5.25% to 5.5% in July 2023.
*   Subsequent FOMC meetings kept rates at the same level, which the FOMC confirmed in its July 2024 meeting.
*   On Sept. 18, 2024, the FOMC announced that it would cut its target range by half a percentage point to 4.75% to 5%. This was after four years without any rate cuts as it fought post-pandemic inflation.
*   From Jan. 1, 2025, to May 7, 2025, the FOMC maintained a range of 4.25% to 4.5%.

## What Does the Federal Reserve System Do?

The Federal Reserve uses monetary policy tools to meet its three main purposes of:

1.  Maximum employment
2.  Stable prices
3.  Moderate long-term interest rates

These goals were laid out in the Federal Reserve Act that created the Federal Reserve System.

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

Past examples provide insights into a financial system without a central bank. Banks were free to set their own policies, the economy didn't have an entity guiding it, and crashes and bank runs were prevalent. It's very likely the U.S. financial system would be in chaos without the Federal Reserve.

## Who Funds the U.S. Federal Reserve?

The Federal Reserve funds itself from interest on securities acquired from open market operations and from fees for banking services.

## The Bottom Line

The Federal Reserve System is the central banking system of the United States. The Fed, as it is commonly known, implements monetary policy and regulates banking institutions, monitors and promotes the credit rights of consumers, and maintains the stability of the financial system and economy.

> **Article Sources**
>
> 1.  Board of Governors of the Federal Reserve System. "[Board Members](https://www.federalreserve.gov/aboutthefed/bios/board/default.htm)."
>     
> 2.  Board of Governors of the Federal Reserve System. "[Consumer and Community Affairs](https://www.federalreserve.gov/publications/2022-ar-consumer-and-community-affairs.htm)."
>     
> 3.  Board of Governors of the Federal Reserve System. "[About the Fed](https://www.federalreserve.gov/aboutthefed.htm)."
>     
> 4.  Board of Governors of the Federal Reserve System. "[Payment System and Reserve Bank Oversight](https://www.federalreserve.gov/publications/2023-ar-payment-system-and-reserve-bank-oversight.htm#xpaymentservicestodepositoryandother-d39da682)."
>     
> 5.  Board of Governors of the Federal Reserve System. "[Jerome H. Powell, Chair](https://www.federalreserve.gov/aboutthefed/bios/board/powell.htm)."
>     
> 6.  Board of Governors of the Federal Reserve System. "[Fedwire Fund Services](https://www.federalreserve.gov/paymentsystems/fedfunds_about.htm)."
>     
> 7.  Board of Governors of the Federal Reserve System. "[FedNow Service. Frequently Asked Questions](https://www.federalreserve.gov/paymentsystems/fednow_faq.htm)."
>     
> 8.  Federal Reserve History. "[Federal Reserve Act Signed Into Law](https://www.federalreservehistory.org/essays/federal-reserve-act-signed)."
>     
> 9.  Federal Reserve History. "[Overview: The History of the Federal Reserve](https://www.federalreservehistory.org/essays/federal-reserve-history)."
>     
> 10.  Board of Governors of the Federal Reserve System. "[FAQs: Why Does the Federal Reserve Aim for Inflation of 2 Percent Over the Longer Run?](https://www.federalreserve.gov/faqs/economy_14400.htm)"
>      
> 11.  Board of Governors of the Federal Reserve System. "[Federal Open Market Committee: About the FOMC](https://www.federalreserve.gov/monetarypolicy/fomc.htm)."
>      
> 12.  Board of Governors of the Federal Reserve System. "[Policy Tools: Open Market Operations](https://www.federalreserve.gov/monetarypolicy/openmarket.htm)."
>      
> 13.  Federal Reserve History. "[The Great Recession](https://www.federalreservehistory.org/essays/great-recession-of-200709)."
>      
> 14.  Board of Governors of the Federal Reserve System. "[Federal Reserve Issues FOMC Statement, Dec. 16, 2015](https://www.federalreserve.gov/newsevents/pressreleases/monetary20151216a.htm)."
>      
> 15.  Board of Governors of the Federal Reserve System. "[Federal Reserve Issues FOMC Statement, July 31, 2019](https://www.federalreserve.gov/newsevents/pressreleases/monetary20190731a.htm)."
>      
> 16.  Board of Governors of the Federal Reserve System. "[Federal Reserve Issues FOMC Statement, March 15, 2020](https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315a.htm)."
>      
> 17.  Board of Governors of the Federal Reserve System. "[Open Market Operations](https://www.federalreserve.gov/monetarypolicy/openmarket.htm)."
>      
> 18.  Board of Governors of the Federal Reserve System. "[Federal Reserve Issues FOMC Statement, July 26, 2023](https://www.federalreserve.gov/newsevents/pressreleases/monetary20230726a.htm) ."
>      
> 19.  Board of Governors of the Federal Reserve System. "[Federal Reserve Issues FOMC Statement, June 12. 2024](https://www.federalreserve.gov/newsevents/pressreleases/monetary20240612a.htm)."
>      
> 20.  Board of Governors of the Federal Reserve System. "[Federal Reserve Issues FOMC statement, Sept. 18, 2024](https://www.federalreserve.gov/newsevents/pressreleases/monetary20240918a.htm)."
>      
> 21.  Board of Governors of the Federal Reserve System. "[Federal Reserve Issues FOMC Statement, Jan. 29, 2025](https://www.federalreserve.gov/newsevents/pressreleases/monetary20250129a.htm)."
>      
> 22.  Board of Governors of the Federal Reserve System. "[Federal Reserve Issues FOMC Statement, May 7, 2025](https://www.federalreserve.gov/newsevents/pressreleases/monetary20250507a.htm)."
>      
> 23.  Board of Governors of the Federal Reserve System. "[Conducting Monetary Policy](https://www.federalreserve.gov/aboutthefed/files/pf_3.pdf)," Page 1.