Federal Reserve System: Formulating Monetary Policy

The four main areas of the Fed’s responsibility are: (1) Directing the monetary policy of the United States by means of exerting influence on money and credit conditions; (2) Regulating banking institutions thereby ensuring the soundness of the banking and financial system, while at the same time protecting the credit rights of consumers; (3) Seeking to maintain the stability of the nation’s financial system by recognizing and containing systemic risk in financial markets; (4) Playing a significant role in the US payment systems and providing specialized financial services to the United States government, financial institutions, members of the public and official foreign institutions.

The seven members of the Board of Governors of the Federal Reserve System are appointed to serve fourteen-year terms of office, with the Chairman and Vice Chairman serving four-year terms. Appointments to the Board are made by the President of the United States and confirmed by the Senate. The primary responsibility of the board is to formulate monetary policy, as well as to regulate and supervise banks that are members of the Federal Reserve System. Other functions include ensuring the smooth running of the United States payments system; and the administration of regulations governing consumer credit.

Although referred to collectively as “The Fed”, the Federal Reserve actually consists of the Board of Governors as a central governmental agency, along with twelve regional Federal Reserve Banks located in major centers, all working together to carry out their duties, some of which are mentioned above. All seven Board members are also members of the Federal Open Market Committee (FOMC) which administers open market operations used by the Fed to influence the growth of money and credit, and money market conditions.