Federal Reserve
Overview
The Federal Reserve (Federal Reserve System, 연준) is the central banking system of the United States, established in 1913 under the Federal Reserve Act. It was designed as a decentralized structure in which the Board of Governors in Washington, D.C., the 12 regional Federal Reserve Banks, and the Federal Open Market Committee (FOMC) check one another. It determines U.S. monetary policy, manages the stability of the financial system, and, as the issuer of the U.S. dollar—the world's reserve currency—exerts enormous influence on the global economy.
Key Details
Founding Background and History
When the Panic of 1907 triggered large-scale bank runs, the limitations of an emergency currency system centered on private banks were laid bare. In response, President Woodrow Wilson signed the Federal Reserve Act on December 23, 1913, and the Fed was launched. Its authority expanded through the Great Depression of the 1930s, and it secured the independence of monetary policy through the 1951 agreement with the Treasury (the Federal Reserve–Treasury Accord). After experiencing stagflation in the 1970s, Chairman Paul Volcker brought inflation under control with a high interest rate policy, and in 2012 a 2% inflation target was officially adopted.
Organizational Structure
- Board of Governors: Composed of seven governors appointed by the President and confirmed by the Senate, serving 14-year terms. The Chair and Vice Chair are appointed separately to four-year terms.
- Federal Open Market Committee (FOMC): Composed of 12 members in total: the seven governors, the President of the Federal Reserve Bank of New York, and four of the remaining 11 regional Bank presidents selected on a rotating basis. It holds eight regular meetings a year to set the policy rate.
- 12 regional Federal Reserve Banks: Located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco, they handle supervision and payment and settlement functions.
Main Functions
1. Conducting monetary policy: It pursues the dual mandate of price stability and maximum employment.
2. Financial regulation and supervision: It supervises large bank holding companies and foreign bank branches, among others, and conducts stress tests.
3. Maintaining financial stability: As lender of last resort, it supplies funds during liquidity crises.
4. Operating the payment and settlement system: In July 2023, it launched FedNow, a real-time payment network.
Monetary Policy Tools
The most representative tool is adjusting the target range for the federal funds rate (the policy rate). In addition, interest on reserves (IOER), reverse repurchase agreements (RRP), the discount rate, and reserve requirement adjustments are used. When the policy rate approaches 0%, quantitative easing (QE)—purchasing Treasury securities and mortgage-backed securities (MBS)—expands the balance sheet, while quantitative tightening (QT) shrinks it. Large-scale QE was implemented during the 2008 financial crisis and the 2020 COVID-19 pandemic, and the balance sheet swelled to about $9 trillion by 2022.
Notable Past Chairs
Prominent figures include Paul Volcker (1979–1987), Alan Greenspan (1987–2006), Ben Bernanke (2006–2014), Janet Yellen (2014–2018), and Jerome Powell (2018–present). Powell was reappointed in 2022, and his term as Chair ends in May 2026.
Latest Trends
In 2024, citing slowing inflation and a cooling labor market, the Fed cut rates three times during the year, beginning with a 50bp cut in September, lowering the policy rate to 4.25–4.50%. In 2025, with concerns about renewed inflation from tariff hikes pitted against a slowing labor market, a gradual easing trend continued, and the balance sheet reduction (QT) also entered its final stages. At the Jackson Hole meeting in August of that year, Chair Powell announced a shift away from average inflation targeting to a flexible inflation targeting framework, revising the 2020 framework after five years. Meanwhile, as the Trump administration's pressure for rate cuts coincided with discussions of replacing Fed personnel, the debate over central bank independence heated up again, and research on CBDC (central bank digital currency) and discussions on stablecoin regulation proceeded in parallel. The market is reacting sensitively to the FOMC's dot plot and to every remark by its members.
Related Topics
- [[Policy rate]]
- [[Inflation]]
- [[Quantitative easing]]
- [[FOMC]]
- [[Central bank]]
- [[Dollar]]