Commonly referred to as “The Fed,” The Federal Reserve Bank System is the central bank of the United States. Its mission is “to foster the stability, integrity, and efficiency of the nation's monetary, financial, and payment systems so as to promote optimal macroeconomic performance.” The Fed system is comprised of three parts: (1) 12 regional banks with independently appointed presidents; (2) the Federal Open Markets Committee (FOMC) which sets national monetary policy; and (3) the Board of Governors.
The Fed and Independence
Independence from political influence is pivotal to the Fed’s ability to successfully execute its mission, serving the long-term public interest rather than short-term political objectives. The structure of the system was established to promote such independence. The seven governors, chair, and vice chair of the board are nominated by the president and confirmed by Congress. The governors’ 14-year terms and the chair and vice chair’s four-year terms are staggered to minimize the influence of any one presidential administration.
The Fed is not typically funded by congressional appropriations. Except in times of crisis, funding for the Fed is generated from its asset portfolio, predominantly government securities bought on the open market. Any income in excess of operational expenses is deposited into the U.S. Treasury.
The Fed and Financial Crises
The Fed was established in 1913 through the passage of the Federal Reserve Act to promote economic and financial stability, after a financial panic in 1907. Its powers were expanded in 1932, in the wake of the Great Depression, with the Emergency Relief and Construction Act and the addition of Section 13(3) to the Federal Reserve Act. Section 13(3), which empowered the Board of Governors to authorize reserve banks to extend credit to individuals, partnerships, and corporations in “unusual and exigent circumstances,” was used in 2008 to aid non-bank institutions for the first time since 1936. It is the authority under which the Fed is enacting much of its emergency response to the COVID-19 crisis.