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What is the Fed?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 04 November 2016
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The Federal Reserve System or “Fed,” as it is sometimes known, is the central banking system of the United States. This institution has a number of functions in the American economy, with the primary goal of setting economic policies which will benefit the United States while keeping the American economy healthy and stable. As of 2006, Ben Bernanke headed the Fed as the Chairman, with a term expected to expire in 2010. He was preceded by Alan Greenspan, who served multiple terms as the Chairman of the Federal Reserve Board of Governors from 1987 to 2006.

The Fed was established in 1913 in response to a major banking panic which occurred in 1907. Numerous acts of legislation since 1913 have shaped the nature of the Fed and the kind of work it does, unfortunately often in retrospect after financial crises have already occurred. It attempts to balance the need of private banks against the needs of the American people and the American government.

By setting monetary policy, the Fed hopes to keep the American economy stable, but it is occasionally required to intervene. The Fed may step forward to cut interest rates or make other policy changes, and it also acts as a lender of last resort in a financial crisis. The Fed supplies liquidity to banks across the United States, helps to keep the supply of currency stable, regulates private banks, and provides protections for consumers.

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There are several aspects to the Fed. At the top of the Fed's power structure is the Board of Governors, a seven-member group of individuals appointed by the President of the United States to serve 14 year terms. By tradition, the Chairman of the Board of Governors is selected from the members of the Board by the President of the United States, with the Chairman acting in that capacity for four years before returning to a regular position on the board of governors.

Below the Board of Governors are the 12 Federal Reserve Banks, located in Chicago, New York, San Francisco, Boston, Philadelphia, Atlanta, Richmond, Minneapolis, Dallas, Kansas City, Saint Louis, and Cleveland. Each bank oversees a section of the United States, with its own Board of Governors.

Between the Presidentially-appointed Board of Governors and the Federal Reserve Banks in the Fed's hierarchy, one can find the Federal Open Market Committee, the policy-making arm of the Fed. The Open Market Committee includes the seven Board Members, along with five rotating members taken from the boards of the Federal Reserve Banks. The Federal Reserve System also includes private member banks and supplementary councils of advisers which help the bank set policy and predict the future of the American economy.

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