What Is the Federal Reserve?

The Federal Reserve is not a single building or a single voice. It is a complex system designed to combine national coordination with regional insights. As former President Donald Trump escalates criticism of Fed Chair Jerome Powell and raises the unprecedented possibility of replacing him, let’s dive deeper into the structure of the Fed.

The Board of Governors Provides Central Oversight from Washington

At the top of the system sits the Board of Governors, located in Washington, D.C. It includes seven members appointed by the president and confirmed by the Senate, each serving staggered 14-year terms. These governors oversee the entire Federal Reserve System, draft regulations, and help steer monetary policy – including the all-important federal funds interest rate – for the nation.

12 Regional Reserve Banks Offer Local Expertise and Economic Research

The second tier of the Fed includes 12 regional Reserve Banks, each serving a different part of the country. These banks are headquartered in cities like New York, Chicago, Dallas, and San Francisco. Their main responsibilities include supervising local banks, distributing currency, operating parts of the payments system, and conducting economic research tied to their region.

Each regional Reserve Bank develops areas of specialization. For example:

  • The New York Fed manages financial market operations and foreign currency reserves.
  • The St. Louis Fed maintains FRED, a leading economic data platform.
  • The Dallas Fed focuses on energy economics and the oil and gas industry.
  • The Cleveland Fed conducts major research on inflation expectations.

Others concentrate on fintech, labor markets, housing, or payment technologies. This diversity helps the Fed stay responsive to different economic conditions across the country.

The Federal Open Market Committee Sets Interest Rates

The Federal Open Market Committee (FOMC) is the group that decides whether to raise or lower interest rates in the United States. It meets eight times a year to assess the state of the economy and vote on changes to the federal funds rate – the rate banks charge each other for overnight loans. That rate, in turn, influences borrowing costs across the entire economy, from mortgages to credit cards, essentially functioning as the tectonic plates undergirding almost the entire economy.

The committee has 12 voting members: the seven members of the Board of Governors, the president of the New York Fed (who always has a vote), and four of the remaining 11 Reserve Bank presidents, who rotate in each year.

Decisions are made by a simple majority vote. When there is disagreement, dissenting votes are recorded and made public to help signal different views inside the Fed without undermining its overall credibility.

READ MORE: What the Fed Does and Why Its Role Matters Now

Other Parts of the Fed System

The Fed system also includes a network of advisory councils that represent consumers, businesses, and communities. There are national service lines that handle logistics like cash distribution, check clearing, and digital payment infrastructure.

Why the Fed’s Structure Matters

One defining feature of the Fed is its political independence. Governors serve long terms and can only be removed “for cause” on specific grounds such as “inefficiency, neglect of duty, or malfeasance in office” – a standard established in 1935 by the Supreme Court in Humphrey’s Executor v. United States. Regional Reserve Bank presidents are appointed by local boards and approved by the Board of Governors, not by elected officials.

Authority is spread across multiple levels to prevent any single person or political office from dominating monetary policy. Most other developed countries – including Britain, Japan and Germany – also have independent central banks that are designed to be insulated from short term political pressures.

A System Built for Balance

The Federal Reserve’s structure reflects a deliberate effort to balance national priorities with regional realities. It was designed to keep the economy stable, decisions well-informed, and the institution shielded from short-term political pressure. As debates continue over its role and leadership, that design remains one of the most important features of U.S. economic governance.

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