 
How is the Federal Reserve structured?
The Federal Reserve System (called the Fed, for short) is the nation's
central bank. It was established by an Act of Congress in 1913 and consists
of the Board of Governors in Washington, D.C., and twelve Federal Reserve
District Banks (for a discussion of the Fed's overall responsibilities,
see The Federal Reserve System: Purposes and Functions).
The Congress
structured the Fed to be independent within the government--that is,
although the Fed is accountable to the Congress and its goals are
set by law, its conduct of monetary policy is insulated from day-to-day
political pressures. This reflects the conviction that the people who
control the country's money supply should be independent of the people
who frame the government's spending decisions.
What makes the Fed independent?
Three structural features give the Fed
independence in its conduct of monetary policy: the appointment procedure
for Governors, the appointment
procedure for Reserve Bank Presidents, and funding.
Appointment procedure
for Governors. The seven Governors on the Federal Reserve Board
are appointed by the President of the United States and
confirmed by the Senate. Independence derives from a couple of factors:
first, the appointments are staggered to reduce the chance that a single
U.S. President could "load" the Board with appointees; second,
their terms of office are 14 years--much longer than elected officials'
terms.
Appointment procedure for Reserve Bank Presidents. Each Reserve
Bank President is appointed to a five-year term by that Bank's Board
of Directors,
subject to final approval by the Board of Governors. This procedure adds
to independence because the Directors of each Reserve Bank are not chosen
by politicians but are selected to provide a cross-section of interests
within the region, including those of depository institutions, nonfinancial
businesses, labor, and the public.
Funding. The Fed is structured to
be self-sufficient in the sense that it meets its operating expenses
primarily from the interest earnings
on its portfolio of securities. Therefore, it is independent of Congressional
decisions about appropriations.
How is the Fed "independent within
the government"?
Even though the Fed is independent of Congressional
appropriations and administrative control, it is ultimately accountable
to Congress and
comes under government audit and review. Fed officials report regularly
to the Congress on monetary policy, regulatory policy, and a variety
of other issues, and they meet with senior Administration officials
to discuss the Federal Reserve's and the federal government's economic
programs.
The Fed also reports to Congress on its finances.
Who makes monetary
policy?
The Fed's FOMC (Federal Open Market Committee) has primary
responsibility for conducting monetary policy. The FOMC meets in Washington
eight
times a year and has twelve members: the seven members of the Board
of Governors,
the President of the Federal Reserve Bank of New York, and four
of the other Reserve Bank Presidents, who serve in rotation. The remaining
Reserve
Bank Presidents contribute to the Committee's discussions and deliberations.
In
addition, the Directors of each Reserve Bank contribute to monetary
policy by making recommendations about the appropriate discount
rate, which are subject to final approval by the Governors.
 
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