 Ask
Dr. Econ
September 2003
Is the Federal Reserve a privately owned corporation?
Yes and no. The Federal Reserve (the Fed) enjoys a unique public/private
structure that operates within the government, but is still relatively
independent of government to isolate the Fed from day-to-day political
pressures in fulfilling its varying roles. As stated in The Federal
Reserve System Purposes & Functions:
The Federal Reserve System is considered to be an independent central
bank. It is so, however, only in the sense that its decisions do
not have to be ratified by the President or anyone else in the executive
branch of the government. The entire System is subject to oversight
by
the U.S. Congress….the Federal Reserve must work within the
framework of the overall objectives of economic and financial policy
established
by the government.
History
Prior to the Fed’s formation, the United States experienced a
number of economic downturns and financial panics. To help alleviate
the problems associated with these swings in the economy, President Woodrow
Wilson signed the Federal Reserve Act on December 23, 1913. The act’s
opening paragraph outlines its varying functions:
An Act to provide for the establishment of Federal reserve banks, to
furnish an elastic currency, to afford means of rediscounting commercial
paper, to establish a more effective supervision of banking in the United
States, and for other purposes.
Since 1913, legislation has passed to augment some of the act’s
original purposes and to clarify the varying roles of the Fed.
Structure
Congress set up the Federal Reserve System to make it autonomous and
to isolate it from day-to-day political pressures. For example, the members
of the Board of Governors are appointed to serve 14-year terms that do
not coincide with presidential terms. Key components of the Federal Reserve
System are:
- The Board of Governors—Located in Washington, D.C.,
Board members are appointed by the U.S. President and confirmed by
the U.S. Senate. Board members and staff are civil service employees.
- The 12 regional Reserve Banks—Located around the country,
the 12 Federal Reserve Banks are chartered as private corporations.
Employees
are not civil service.
- The Federal Open Market Committee (FOMC)—Composed of the
Federal Reserve Governors and the Federal Reserve Bank presidents,
the FOMC is
charged with conducting monetary policy.
The 12 Federal Reserve Banks operate like other businesses; each has
its own board of directors that selects the Reserve Bank president and
first vice president, with approval from the Board of Governors. Each
Branch of a Reserve Bank has its own board of directors. A majority of
these directors are appointed by the Branch’s Reserve Bank; the
others are appointed by the Board of Governors.
Boards of directors of the Reserve Banks and their Branches provide
the Federal Reserve System with a wealth of information on economic conditions
in every corner of the nation. The information, along with other sources,
is used by the FOMC and the Board of Governors when reaching decisions
about monetary policy.
Key Responsibilities
While Congress establishes key objectives the Fed must follow, the Fed
generally works independently of the federal government to administer
its core responsibilities.
Those duties include:
- Conducting monetary policy
- Supervising and regulating banking and financial institutions
- Providing payments services to financial institutions
The 12
Federal Reserve Banks have “independent” research staffs
that advise their Reserve Bank presidents on monetary policy and the
economy. Each Reserve Bank
also has regulatory responsibilities including the supervision and regulation
of financial institutions. The Reserve Banks also handle the Federal
Reserve System’s business operations—it is in this area that
Reserve Banks operate more like private businesses, selling services
like electronic funds transfers, check processing, and coin and currency
services to financial institutions.
Funding
Congress also created the Federal Reserve System to be self-funding.
The Fed earns interest on the interest-bearing government securities
it holds in its portfolio and sells financial services to banks. This
amount is reported each year in its annual
report.
The Fed’s earnings typically far exceed its expenses. However,
unlike for profit corporations, the Fed distributes any profit (after
costs) to the U.S. Treasury. In 2002, the Fed’s operating revenues
were $26.7 billion, expenses total $2.2 billion, and $24.5 billion was
paid to the treasury as “interest on Federal Reserve Notes.” The
graph below displays the flow of the Fed’s annual payments to the
U.S. Treasury for the past five years.
References:
Dunne, Gerald T. A
Christmas Present for the President: A Short History of the Creation
of the Federal Reserve System. Federal
Reserve Bank of St. Louis. 1984.
Board
of Governors of the Federal Reserve System 2002 Annual Report,
pp.286-87.
The
Federal Reserve System in Brief, Federal Reserve
Bank of San Francisco, August 2000
The Federal Reserve System Purposes and Functions. Board of Governors
of the Federal Reserve System. 1994.
Making
Sense of Money: Personal Financial Education, Federal Reserve
Bank of San Francisco 2002 Annual Report, pp. 43-57.
Stevens, Edward. 1996. “The Founders Intentions: Sources of the
Payment Services Franchise of the Federal Reserve Banks.” Financial
Services Working Paper.
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