Who Can Borrow Money From The Federal Reserve Bank

The Federal Reserve, or "the Fed," is the central banking system of the US.
The purpose of the Federal Reserve is to regulate banks, manage the country's money supply, and implement monetary policy.
The Federal Reserve System consists of three entities: The Federal Reserve Board of Governors, 12 regional banks, and the Federal Open Market Committee (FOMC).
Visit Insider's Investing Reference library for more stories .

There's a bank, and then there's the bank.

The Federal Reserve, or "the Fed," is the central banking system of the United States, and just about everything it carries out influences your financial decisions and opportunities more than you may realize.

An independent federal agency, the Fed was established in 1913 in response to a series of bank failures and stock market panics that were causing growing unease with the US' largely unregulated financial system.

By creating a central bank, the government hoped to provide a stable yet flexible authority that could manage the nation's monetary policy, regulate its financial institutions, and instill confidence in the US economy.

Here's what you need to know about the Fed, and how it affects you and your money.

What does the Federal Reserve do?

The Fed's mission is the same now as it was when it was established: To serve the public interest and provide the country with a safe and stable financial system. The Federal Reserve's main responsibilities include:

Managing the nation's money and money supply
Maintaining banking payment and transaction systems
Creating and monitoring rules for banks and financial systems
Ensuring that banks are offering quality products and following consumer protection laws
Setting certain key interest rates

By overseeing the nation's banks and influencing interest rates, the Fed impacts the economy and Americans' financial lives.

While it doesn't interact directly with individuals, it ensures they can deposit a check, use a debit card, and transfer funds safely and consistently. And the policies the Fed sets ultimately affect how easy or hard it is to qualify for a mortgage, the interest you'll pay on a loan, and how much money that savings account or CD will earn you.

How is the Federal Reserve structured?

Headquartered in Washington D.C., the Federal Reserve comprises three major entities: the board of governors, the 12 regional regional reserve banks, and the Federal Open Market Committee (FOMC).

The Federal Reserve Board of Governors

The Federal Reserve Board of Governors is the main governing body of the entire Federal Reserve System. The Board is made up of seven members; each is nominated by the President and confirmed by the Senate.

As written in the Fed's founding statute, the Board of Governors must consist of a "fair representation of the financial, agricultural, industrial, and commercial interests and geographical divisions of the country."

Board members serve a maximum term of 14 years, with new members being circulated in regularly.

The Board must appear before Congress at least twice per year to report on "the efforts, activities, objectives and plans of the Board and the Federal Open Market Committee." Board staff regularly meets with Congressional staff to brief them on financial issues and the Federal Reserve's intended remedy or course of action.

The Board's other responsibilities include general guidance for the system, serving on the Federal Open Market Committee, and overseeing the 12 Reserve Banks.

The 12 Federal Reserve Banks

Compared to those of other nations, the US central bank is somewhat de-centralized.

The Federal Reserve has 12 regional offices, known officially as Federal Reserve Banks. Each office, which has its own Board of Directors and President, is responsible for a district of several states surrounding it:

Individual financial institutions are regulated by the Federal Reserve Bank in their region.

Reserve Banks basically serve as branches of the entire Federal Reserve system. Originally, they were intended to operate independently, setting their own policies and interest rates. But as the US economy grew more complex and geographically integrated, new legislation in the 1930s and in 1980 made them more coordinated with each other and with their federal parent.

Today, each Federal Reserve Bank is responsible for implementing the decisions of the Fed's Board of Governors and enforcing its rules on a regional level. It's the district Federal Reserve Bank that directly oversees individual, local banks — granting their charters and inspecting their operations.

Some of the day-to-day services the Reserve Banks provide include:

Releasing new coins and paper bills to banks
Taking in defaced, ripped, or counterfeit currency
Processing and clearing checks
Loaning money to banks
Maintaining US Treasury bank accounts

While the regional banks don't set monetary policy, they do provide economic research to the national Fed — data and analysis that play a key role in the decisions made by the central bank's all-important Federal Open Market Committee.

The Federal Open Market Committee

The third and arguably most influential arm of the Federal Reserve is the Federal Open Market Committee or FOMC. Added to the Fed in the 1930s, this policy-making group is made up of 12 voting members, including all seven Fed Governors, the President of the Federal Reserve Bank of New York, and four of the 11 other Reserve Bank Presidents.

The group meets at least eight times per year and is responsible for reviewing the country's economic conditions, conducting risk assessments on economic growth, and managing the federal funds rate.

When the alert flashes on your phone or you hear a newscaster say, "the Fed cut interest rates today," it's a move by the FOMC they're referring to.

How does the Federal Reserve influence interest rates?

One of the Federal Reserve's mandates is to manage the US money supply (the amount of cash and readily available funds circulating throughout the nation). Its main method for doing this involves interest rates. The most important one: the federal funds rate.

When people refer to the Fed raising or lowering interest rates, they're talking about the federal funds rate. Although it's an interbank rate, which doesn't affect consumers directly, it becomes the basis for other interest rates, like the prime rate — which do.

The federal funds rate is the interest rate at which banks can borrow and lend money to one another. Under Federal Reserve quota rules, banks are required to keep a certain percentage of overall deposits in reserve, to ensure that account-holders can access their money at any time, preventing any "bank runs" or financial panic.

If an institution falls short of the requirement, it may turn other banks for additional funding. If a bank has excess reserves, it will loan them out.

Setting the federal funds rate is arguably the most important responsibility of the Federal Reserve. Banks generally make a profit by lending money for a greater price than they obtained it.

So lowering the cost of financing for the bank has a ripple effect: The savings ultimately gets passed down to the everyday consumer looking to purchase a house, take out a loan, or engage in any other financial transaction. Changes in the federal funds rate also ultimately affect how much interest bank savings accounts and CDs earn.

How does the Federal Reserve influence the economy?

The Fed has other tools in its arsenal to encourage banks to ramp up or rein in their financing activities. Among them:

Modifying the reserve requirement. As mentioned, banks are responsible for keeping a percentage of their total deposits in reserves. If the Federal Reserve wanted to expand the money supply, it can simply lower this requirement, so banks have more money to lend. If it wants to tighten the money supply, it raises the requirement.
Setting the "discount rate." Instead of borrowing from one another, financial institutions can also borrow money directly from one of the regional Federal Reserve bank "windows." The rate at these windows is often higher than the federal funds rate itself and serves as the cap for the market — no bank would want to pay more money when a lower rate is available. As a result, the Federal Reserve can encourage banks to borrow from one another and can effectively limit the amount of interest charged.
Increasing the interest rates paid on bank reserves. The Fed can change the amount of interest it pays banks on their reserves. Banks will not loan money to one another for less than that amount, so this move by the Fed effectively sets a floor for market interest rates.

Constantly gauging the pace of the US economy, the Federal Reserve is able to help the country either slow down or speed up its investing and spending and keep inflation moderate.

Who oversees the Federal Reserve?

When created in 1913, the Federal Reserve was intended to be an independent government organization that can operate without Congressional oversight or funding — or, in fact, management by any authority in the executive branch.

While the Board of Governors does report on its activities to Congress at least twice per year, it is not overseen or controlled by anyone. In fact, the Federal Reserve doesn't even receive any money or appropriation from Congress. It's financed mainly by the interest on the US Treasury securities it owns, along with the interest it charges on its bank loans, and fees for maintaining various interbank transactional services.

That is not to say that the Federal Reserve is not responsible to anyone. First and foremost, it is responsible to the American people and as such operates in a very transparent fashion — even going so far as to publish its meeting minutes and public policy briefs on its website.

The financial takeaway

The Fed's key objective — to ensure an even money supply, and through that, a healthy economy — has been put to the test several times throughout its history. The Federal Reserve has been instrumental in helping the country navigate through the Great Depression, the 2007- 2009 Great Recession, and the COVID-19 pandemic.

The central bank can only do so much to alter the natural up and down trends of the business cycle. But, by modifying the federal funds rate, increasing the money supply, and lowering financing costs to banks — and ultimately, to their clients, businesses and consumers — the Federal Reserve can try to prevent severe recessions or lessen the blow of other economic crises.

Related Coverage in Investing Reference:

The Federal Reserve's biggest success during the coronavirus crisis: keeping itself out of politics

Depressions and recessions differ in their severity, duration, and overall impact. Here's what you need to know

Fed signals near-zero rates will last through 2023 to lift economy

The LIBOR is a global interest rate that affects the rates of many loans and investments. Here's how it's set, and why it's slated to end

Why double-dip recessions are especially difficult, and what they mean for the general state of the economy

For you