What is the Federal Reserve and what does it do?

The Federal Reserve has likely come across your radar at some point. Often referred to as simply "the Fed," this central banking system of the United States typically meets eight times a year to make interest rate–related decisions, which often result in a slew of headlines and fodder from economic experts, alongside very real economic effects.

Since President Trump took office, the Federal Reserve has gotten even more airtime, as Trump has questioned the Fed's authority and criticized its decisions. But what actually is the Federal Reserve, and what does it do?

What is the Federal Reserve?

The Federal Reserve System — also known as the Federal Reserve or the Fed — is the central bank of the United States, which "sets policies to keep the economy steady and controls the money supply, among other responsibilities," said NerdWallet. Established in 1913, it is "an independent government agency accountable to Congress and U.S. citizens," said Yahoo Finance.

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What is the structure of the Fed?

Rather than being a single entity, as is the case for central banks in many other countries, the Fed is comprised of three parts, each serving a distinct function:

The Federal Reserve Board of Governors: This portion of the Fed, based in the District of Columbia, "oversees the decentralized network of 12 Federal Reserve Banks as well as the general goals of the Fed," said NerdWallet. It is made up of "seven members called governors whom the U.S. president nominates and the Senate confirms."

12 Federal Reserve Banks: These reserve banks, located in 12 cities throughout the U.S., "serve as regulators of various financial institutions, lenders of last resort for banks that lack enough money in reserves and operators of U.S. payments for both Automated Clearing House and wire transfers," in addition to acting as "the government's bank," said NerdWallet. 


The Federal Open Market Committee (FOMC): This is the group, made up of "the members of the Board of Governors and four presidents of the Federal Reserve Banks," that meets "at least eight times a year to vote on monetary policy decisions such as interest rates," said MorningStar.

What are the Federal Reserve's responsibilities?

The monetary policy goals of the Federal Reserve "are twofold: to foster economic conditions that achieve stable prices and maximum sustainable employment," said Investopedia.

In service to those goals, the Fed has the following responsibilities:

Conduct monetary policy, which "primarily refers to the Fed's interest rate decisions, which help steer the U.S. economy," said Bankrate.

Ensure the financial markets run smoothly, by "maintaining financial system stability and containing systemic risk," said Investopedia.

Oversee the nation's banks "to ensure those institutions are financially sound and following existing laws or regulations," and that consumers are adequately protected, said Bankrate.

Provide financial services, "including a pivotal role in operating the national payments system, depository institutions, the U.S. government and foreign official institutions," said Investopedia.