I.

Introduction

Federal Reserve System, central banking system of the United States, popularly called the Fed. A central bank serves as the banker to both the banking community and the government; it also issues the national currency, conducts monetary policy, and plays a major role in the supervision and regulation of banks and bank holding companies. In the United States these functions are the responsibilities of key officials of the Federal Reserve System, which is made up of a Board of Governors, located in Washington, D.C., and 12 district Federal Reserve banks, located throughout the nation. The Fed's actions generally have a significant effect on U.S. interest rates and, subsequently, on stock, bond, and other financial markets. See also United States (Economy).

The Federal Reserve's basic powers are concentrated in the Board of Governors, which is paramount in many policy issues concerning bank regulation and supervision and in most aspects of monetary control. The board announces the Fed's policies on both monetary and banking matters. Because the board is not an operating agency, most of the day-to-day implementation of policy decisions is left to the district Federal Reserve banks, stock in which is owned by the commercial banks that are members of the Federal Reserve System. Ownership in this instance, however, does not imply control; the Board of Governors and the heads of the Reserve banks orient their policies to the public interest rather than to the benefit of the private banking system.

The U.S. banking system's regulatory apparatus is complex. The Federal Reserve shares authority in some instances—for example, in approving bank mergers or in examining banks—with other federal agencies such as the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (FDIC). In the critical area of regulating the nation's money supply and influencing interest rates in accordance with national economic goals, however, the Federal Reserve is independent within the government.

This independence is partially ensured by the fact that the income and expenditures of the Federal Reserve banks and of the Board of Governors are not subject to the congressional appropriation process; the Federal Reserve is self-financing. Its income comes mainly from interest on Reserve bank holdings of income-earning securities, primarily those of the U.S. government. Outlays and other charges are mostly for operational expenses in providing services to the government and for expenditures connected with regulation and monetary policy.