How the Fed works?

Some have asked how the Federal Reserve in the US works.

The Fed is headed by a government agency in Washington DC known as the Board of Governors of the Federal Reserve. The Board of Governors consists of seven presidential appointees, each of whom serves 14-year terms . All members must be confirmed by the Senate and can be reappointed. The board is led by a chairman and a vice chairman, each appointed by the President and approved by the Senate for four-year terms. The current chair is Ben Bernanke, who took over for Alan Greenspan on February 1, 2006. Greenspan had been chairman since 1987.

The Fed was devised as a decentralised central bank and also has 12 regional banks that have public and private components. The location of the banks reflects the demographics of the early 1900’s, rather than that of today – there is a Fed Bank in Dallas but not in bigger Texas cities such as Houston. The 12 “ bankers’ banks” process cheques, move currency into and out of circulation, help supervise commercial banks and provide regional perspectives. The income gathered from these activities is used to finance day-to-day operations, including information gathering and economic research. Any excess income is funneled back into the U.S. Treasury.

The most prominent way the Fed interacts with the markets, investors and the rest of the country is through setting short-term interest rates. This is conducted by the Federal Open Market Committee (FOMC) – traditionally, the chair of the board is also selected as the chair of the FOMC.

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