Federal Reserve System

The central banking system of the United States, responsible for monetary policy, financial supervision, and payment and settlement services

Federal Reserve System

Overview

The Federal Reserve System (Fed) is the central banking system of the United States, established in 1913 under the Federal Reserve Act. Its core mandates are to formulate the nation's monetary policy, maintain the stability of the financial system, supervise banks, and provide payment and settlement services. It is characterized by a decentralized structure composed of the Board of Governors in Washington, D.C., 12 regional Federal Reserve Banks, and member banks.

Key Details

Background and History

After the Panic of 1907 exposed the fragility of the financial system, the need for a central bank came to the fore, and in 1913 President Woodrow Wilson signed the Federal Reserve Act, launching the Federal Reserve System. Initially it was a decentralized structure centered on the regional Federal Reserve Banks, but through the Great Depression of 1929 and the banking crisis of the 1930s, the authority of the Board of Governors and the FOMC gradually strengthened. The Banking Act of 1935 established the current FOMC system, and the 1977 amendment to the Federal Reserve Act codified the dual mandate of maximum employment and price stability. During the 2008 global financial crisis and the 2020 COVID-19 pandemic, its role expanded further as it mobilized unconventional policy tools such as quantitative easing and large-scale asset purchases.

Organizational Structure

The Federal Reserve System consists of three main pillars. First, the Board of Governors, composed of seven governors appointed by the president, oversees policy in Washington, D.C. Second, the Federal Reserve Banks, which divide the country into 12 districts, reflect the financial and economic conditions of each region and carry out payment, settlement, and supervisory functions. Third, there are member banks among national banks and state banks that meet the requirements. The Federal Reserve Bank of New York holds a permanent voting seat on the FOMC and handles the practical work of open market operations, giving it a particularly important position. Governors serve 14-year terms, a design intended to reduce partisan influence.

Monetary Policy Tools

The Fed's signature policy tool is adjusting the federal funds rate. When the FOMC sets a target range, the New York Fed steers the rate through open market operations. Other tools include reserve requirements, the discount rate, interest on reserve balances (IORB), and reverse repurchase agreements (RRP). Since 2008, quantitative easing (QE) and quantitative tightening (QT) — directly expanding or shrinking the balance sheet — have become major tools. It also conveys signals about the future policy path to the market through forward guidance.

Federal Open Market Committee (FOMC)

The FOMC is the highest decision-making body that determines monetary policy, composed of the seven members of the Board of Governors and five regional Reserve Bank presidents (the New York Fed president permanently, and the other four on a rotating basis). It holds eight regular meetings a year to decide the level of interest rates and asset purchase plans, and publishes meeting minutes and the dot plot to enhance policy transparency. In 2020, it adopted average inflation targeting, deciding to operate the 2% target flexibly.

Supervision and Regulation

The Federal Reserve supervises bank holding companies, state-chartered banks, and branches of foreign banks, maintaining the soundness of the financial system through stress tests and capital adequacy regulation. After the 2010 Dodd-Frank Act, its macroprudential supervisory authority over systemically important financial institutions was strengthened.

Payment and Settlement System

The Federal Reserve operates Fedwire, FedNow, and others, playing a core role in U.S. financial infrastructure. FedNow, launched in 2023, provides real-time small-value payment services, improving payment speed and accessibility.

Recent Trends

In 2024-2025, the Federal Reserve maintained a high interest rate stance after COVID-19 and then continued discussions on transitioning to a gradual rate-cutting cycle as inflation approached its target. In September 2024, it cut the benchmark rate by 0.5 percentage points for the first time in four and a half years, turning from tightening to easing, after which it maintained a cautious approach of adjusting the pace of cuts based on data. At the same time, moves to minimize market shocks by adjusting the pace of balance sheet reduction (QT) were observed. New agendas also emerged, such as regulation of digital assets and stablecoins, discussions of a central bank digital currency (CBDC), and supervision of climate-related financial risks. The impact of AI diffusion on productivity and employment also emerged as a variable in monetary policy judgments, and the debate over central bank independence in political circles remains a major issue.