Preserving Financial Stability: An Introduction to the Federal Reserve System
- MWEG
- 4 days ago
- 5 min read
Generation X children wondered, “Why can’t we just make more money?” — as in, photocopy more green paper — while millennial kids asked to borrow a parent’s seemingly bottomless card. Gens Z and Alpha are double clicking the side button on a phone expecting the money to be available. But, where does it come from? Certainly not on trees, as boomers have chided.
No, beyond the physical production of it — which belongs to the Department of the Treasury — bank notes, credit, and currency are regulated by the Federal Reserve System. The system upholds a robust financial network meant to protect the government and all consumers.
The beginnings of financial regulation in the U.S.
Before a secured system of banking was established, Americans deposited money into banks secured by charters and backed by U.S. government bonds. Panic would ensue when news that might impact the security of those bonds hit and people rushed to financial institutions to withdraw their money. Unequipped for these kinds of emergencies, 19th-century banks often failed. This situation created financial uncertainty and stymied growth while creating a demand for “elastic” currency — that is, access to cash as needed at any point in time.
Eventually, Congress responded with federal financial regulation in the form of The Federal Reserve Act of 1913. The original act, both comprehensive and extensive, has been amended and updated several times, and the nation continues to operate under these regulations today. It drives the Federal Reserve System.
The Federal Reserve System
The Federal Reserve, informally known as the Fed, is the central bank of the U.S. government and aims to be a transparent, nonpartisan, and accountable federal agency. Its purpose is to provide a secure money system for the nation and to support the economy by performing five functions:
1. Conducting monetary policy, e.g., setting interest rates
2. Promoting a healthy economy, e.g., connecting borrowers to lenders
3. Supervising and regulating financial institutions, e.g., bank inspections
4. Ensuring safe payment and settlement systems, e.g., currency and digital payments
5. Providing consumer protection, e.g., ensuring access and security of affordable loans
Interest rates
One of the most widely known responsibilities of the Federal Reserve is control over national interest rates. The Federal Open Market Committee (FOMC) makes all the decisions about interest rates and is composed of the board of governors and five of the 12 Federal Bank presidents. These decisions result from the research and analysis of more than 500 employees, including economists.
The Federal Reserve System is composed of two entities:
The board of governors (a federal agency based in Washington, D.C.)
Run by seven members staggered over 14-year terms.
Nominated by the president and confirmed by the Senate.
At least one governor must have “demonstrated primary experience” in supervising community banks with less than $10B in assets.
All governors who serve together must come from different Federal Reserve districts.
Includes a chair and vice chair who serve one or more additional four-year terms concurrent with the total 14-year term.
Accountable to Congress.
Supervises the 12 Federal Reserve banks.
Banks are split into 12 geographic districts, or operation arms of the Fed.
Regional presidents are appointed by the board of governors and manage each of these districts during their five-year terms.
Each regulates financial institutions in their district.
Ensures consumer and lender protections, promotes community development, and lends to local institutions.
Distributes currency and coins, and manages electronic payment systems.
Acts as the government’s bank, holding the Department of Treasury’s transaction account.
The Federal Reserve as an independent agency
Congress created the Federal Reserve as an independent agency, meaning that while it makes laws and regulates those laws on behalf of the federal government, it is not directly controlled by any branch of government, and its chairperson does not sit on the presidential Cabinet.
Independent agencies differ from federal agencies in two ways:
They are structured with a chair or director and governing committee rather than one department head over all other staff and functions.
They work independent from the executive. Through the Federal Reserve Act, Congress gave rulemaking power to the Federal Reserve, and those regulations are updated and codified by the chair and governor’s board as needed. The Federal Reserve also reports directly to Congress formally twice per year.
While the two departments both deal closely with finances, the Federal Reserve differs from the Department of the Treasury in that it operates as an independent agency, while the Department of Treasury is directed by the executive. The Federal Reserve is the government's financial institution, with economists gathering data and making decisions for the entire financial system, whereas the Department of Treasury performs the duties required by the system, such as currency production and managing the accounts, including paying the bills.
Other examples of independent agencies include the Central Intelligence Agency (CIA), the U.S. Postal Service (USPS), and the Federal Communications Commission (FCC).
Congress also provided safeguards to protect the Federal Reserve from consequences of political pressure by staggering 14-year terms for each of the seven members on the board of governors. Elected officials and members of the administration are prohibited from serving in these positions.
The Federal Reserve’s finances are also independent. It makes money from government interest earnings that generate from federal government securities, banks’ interest on loans, and foreign currency investments. After the Federal Reserve pays its own expenses, it deposits any additional profits into the U.S. Treasury account.
The Federal Reserve undergoes a series of audits multiple times per year by the Government Accountability Office (GAO), conducts its own internal audits, posts weekly balance sheets, and publishes an annual report of the Federal Reserve board of governors.
The Federal Reserve and the executive
As mandated, the Federal Reserve operates independently from the executive branch, with presidents selecting nominees from various industries and parts of the country, and nominating board members on designated cycles. Just as an investor diversifies their funds, the Federal Reserve Act intends for the board of governors to represent different major industries. From academia to agriculture and economics to commerce, governors are experts in a diversity of fields and sectors that impact the nation’s economy.
U.S. presidents appoint members of the board of governors to their positions with the Senate’s advice and consent, as with other federal agencies run by the executive. The precedent is for presidents to nominate or extend their predecessor’s appointees. For example, current Fed chair Jerome Powell was appointed by President Trump during his first term, and President Biden extended Powell’s term another four years (ending in 2026).
Though Presidents Truman, Nixon, and Trump have challenged or attempted to interfere with the Federal Reserve, tradition has held that it operates independently without pressure from the executive branch.
This article was written by Sherilyn Stevenson, lead researcher and writer for Mormon Women for Ethical Government.
