Just the (Fed) Facts

Who "Owns" the Fed?

The Federal Reserve System fulfills its public mission as an independent entity within government.

Congress established the 12 regional Federal Reserve Banks as the operating arms of the nation's central banking system. The Reserve Banks are organized similarly to private corporations—possibly leading to some confusion about "ownership."

For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan. Dividends are, by law, paid to member banks at a maximum rate of 6 percent, determined in part by each member bank's total assets.

The stockholders in the 12 regional Federal Reserve Banks are the privately owned banks that fall under the Federal Reserve System. These include all national banks (chartered by the federal government) and those state-chartered banks that wish to join and meet certain requirements. About 38 percent of the nation's more than 8,000 banks are members of the system, and thus own the Reserve Banks.

The concept of "ownership" needs some explaining here, however. The member banks must by law invest 3 percent of their capital as stock in the Reserve Banks, and they cannot sell or trade their stock or even use that stock as collateral to borrow money. They do receive dividends of 6 percent per year from the Reserve Banks and get to elect each Reserve Bank's board of directors.

The Federal Reserve Act requires that three bankers serve on each Reserve Bank's nine-member board of directors. The other six members represent the public and are not bankers.

Supporting links
Who "Owns" the Federal Reserve?
Federal Reserve Act: Section 4. Federal Reserve BanksOff-site link
Federal Reserve Act: Section 5. Stock Issues; Increase and Decrease of CapitalOff-site link
Federal Reserve Act: Section 7. Division of EarningsOff-site link

What Role Do Bankers Play on Fed Boards of Directors?

The majority of the bankers on Federal Reserve Bank boards of directors are from smaller firms. Community bankers provide insight into local economic conditions, and having them on the board, where they can provide regular updates, helps the Federal Reserve gauge the economy.

The banking directors aren't involved in bank supervision, and the directors who represent private banks don't participate in choosing the Reserve Bank presidents.

To avoid any actual or perceived conflicts of interest resulting from the financial interests and outside affiliations of Reserve Bank directors, Reserve Banks may not provide confidential supervisory information to any director. Moreover, Reserve Bank directors may not participate in bank supervisory matters and may not be consulted regarding bank examination ratings, potential enforcement actions, application/approval matters, or similar supervisory matters.

Similarly, because of the potential for an actual or perceived conflict of interest, Class A (banker) directors may not be involved in the selection, appointment, or compensation of Reserve Bank officers whose primary duties involve supervisory matters. Class B directors who are affiliated with a thrift holding company that is supervised by the Federal Reserve may also not be involved in the selection, appointment, or compensation of Reserve Bank officers whose primary duties involve supervisory matters.

Supporting links
Are the Reserve Banks' boards of directors involved in banking supervision matters?

Structure and Functions of the Federal Reserve System

Is the Fed Constitutional?

The Federal Reserve, like many other central banks, is an independent government agency, but it is ultimately accountable to the public and to Congress.

The Federal Reserve is subject to oversight by Congress, which often reviews the Federal Reserve's activities and can alter its responsibilities by statute. Therefore, the Federal Reserve can be more accurately described as "independent within the government" rather than "independent of government."

The constitutionality of central banking was established through a U.S. Supreme Court precedent. (A precedent is a legal principle that becomes an authority for judges to use in deciding future cases of a similar issue.)

The case, McCulloch v. Maryland, 17 U.S. 316 (1819), was a landmark decision by the U.S. Supreme Court. The case established that the Constitution grants to Congress implied powers for implementing the Constitution's expressed powers, and established that federal laws and treaties are supreme over state law.

Therefore, when Congress enacted the law to incorporate the Second Bank of the United States, it was a valid exercise of its constitutional powers.

Supporting links
What does it mean that the Federal Reserve is "independent within the government"?

U.S. Supreme Court: McCulloch v. Maryland 17 U.S. 316 (1819)

Is the Fed Owned by Foreign Banks?

No. Congress established the 12 regional Federal Reserve Banks as the operating arms of the nation's central banking system. The Reserve Banks are organized similarly to private corporations—possibly leading to some confusion about "ownership."

For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan. Dividends are, by law, paid to member banks at a maximum rate of 6 percent, determined in part by each member bank's total assets. Member banks of the Federal Reserve hold stock in the Reserve Bank for their district. Individuals cannot hold stock.

Member banks include all nationally chartered banks and any state-chartered banks that choose to become members.

More than 8,000 depository institutions representing approximately 34 percent of the nation's banks are members of the system. Although these banks are member owners, they have no control of monetary policy or supervisory authority and make no decisions in these areas.

Supporting links
Who owns the Federal Reserve?

Structure and Functions of the Federal Reserve System

How Does the Fed Set Interest Rates?

The Federal Open Market Committee (FOMC) is deliberative in setting the target for the fed funds rate. In preparation for each FOMC meeting, policymakers analyze economic and financial developments and update their forecasts of economic activity, employment, and inflation over the near and medium term.

The materials they and their staffs review include a wide range of U.S. and international economic and financial data, statistical and judgmental economic forecasts, and analyses of alternative policy approaches. Participants also consult business, consumer, and financial industry contacts to hear their perspectives on economic and financial conditions and the outlook.

At the meeting itself, staff officers present oral reports on the current and prospective business situation, on conditions in financial markets, and on international financial developments. In its discussions, the Committee considers factors such as trends in prices and wages, employment and production, consumer income and spending, residential and commercial construction, business investment and inventories, foreign exchange markets, interest rates, money and credit aggregates, and fiscal policy.

After these reports, the Committee members and other Reserve Bank presidents turn to policy. Typically, each participant expresses his or her own views on the state of the economy and prospects for the future and on the appropriate direction for monetary policy. Then each makes a more explicit policy recommendation.

Finally, the Committee must reach a consensus regarding the appropriate course for policy, which is incorporated in a directive to the Federal Reserve Bank of New York—the Bank that executes transactions for the System Open Market Account. Policy is implemented with emphasis on supplying reserves in a manner consistent with these objectives and with the nation's broader economic objectives.

The FOMC releases minutes of its meetings three weeks after the date of the policy decision.

Supporting links
Federal Open Market Committee

How does the Fed determine interest rates to control the money supply?

How does the Fed decide the appropriate setting for the policy instrument?

How does the Fed determine interest rates to control the money supply?

Is the Fed a Public or Private Organization?

The Fed has both public and private components.  It is a "decentralized central" bank, consisting of the Board of Governors in Washington, D.C., a network of 12 regional Federal Reserve Banks and their branches, and the Federal Open Market Committee (FOMC).

The Board of Governors, located in Washington, D.C., is a federal government agency that is the Fed's centralized component. The seven members of the Board of Governors guide the Federal Reserve's policy actions, study trends in the economy, and help forecast the country's future economic direction. The governors also participate in monetary policymaking on the FOMC. In addition, the Board of Governors is responsible for regulations to keep the banking system sound and for overseeing the operations of the 12 Reserve Banks.

Reserve Banks operate somewhat independently but under the general oversight of the Board of Governors. These Reserve Banks, and their branches, are strategically located in large cities across the country. The economists and other employees in each of the 12 Federal Reserve Districts work together to provide a regional perspective and expert knowledge about their local economies.

The Fed's unique structure helps insulate it from short-term political pressures and allows it to balance different interests—national and regional, public and private. It is an independent central bank in that neither the president nor Congress has to approve its monetary policy decisions. At the same time, the Federal Reserve works within the government in the sense that it formulates monetary policy to achieve overall goals that Congress and the president set.

Like the federal government, the Federal Reserve System was designed to be a compromise between national and regional powers. Its regional base—the 12 Reserve Banks—makes the Fed more flexible and innovative and ensures that its decisions and actions are broadly based. The Board of Governors, acting as general overseer of the Reserve Banks, helps coordinate the Fed's operations. And the Federal Reserve's most important function—formulating and implementing monetary policy—is carried out in light of both regional and national concerns by the Board of Governors, the Reserve Banks, and the FOMC.

Supporting links
What does it mean that the Federal Reserve is "independent within the government"?

How is the Federal Reserve System structured?

Is the Fed Audited?

Yes. The Fed is audited extensively. The Government Accountability Office audits Federal Reserve activities.  The Board of Governors and the Reserve Banks publish their financial statements, and a full list of audits is available on the Board of Governors' website.

The proposed "audit the Fed" legislation asks whether it is prudent to audit monetary policymaking. "Auditing" the Fed in its current portrayal means inserting political and partisan interests into the monetary policymaking process. The concern with the "audit the Fed" bill is that it would not ensure transparency of policy as such but would influence policy decisions in real time.

History shows, not only in the United States but also around the world, that central bank independence promotes better economic performance.

Countries where monetary policy is more susceptible to short-term political interests have higher inflation outcomes—a result that is clearly not in the best interest of Main Street Americans.

The Fed is ultimately accountable to the Congress and the American public, and it seeks to be as transparent about its actions as possible. But good governance calls for a healthy degree of separation between those who spend taxpayers' money and those who print it.

Supporting links
Does the Federal Reserve ever get audited?

Why is it important to separate Federal Reserve monetary policy decisions from political influence?

Is Money Backed by Gold?

U.S. money gets its value from its purchasing power. The real value of money is determined by the goods and services it can buy. As long as people accept money during such transactions, money maintains its ability to purchase.

Paper currency represented a claim on a certain amount of gold or silver during much of U.S. history. However, in 1933, President Franklin Delano Roosevelt removed the United States from the gold standard. The Federal Reserve Banks do hold collateral—U.S. government securities—equal to the value of Federal Reserve notes—that is, paper currency—in circulation.

Hence, U.S. currency is backed by the full faith and credit of the U.S. government. It is fiat money, established through government decree.

Supporting links
Is U.S. currency still backed by gold?

Federal Reserve History: Roosevelt's Gold Program

Federal Reserve History: Overview of Bretton Woods

How Is the Fed Transparent?

The Fed is audited extensively. The Government Accountability Office audits Federal Reserve activities. The Board of Governors and the Reserve Banks publish their financial statements, and a full list of audits is available on the Board of Governors' website.

The Fed publishes its balance sheet every week and minutes of monetary policy deliberations after every meeting.

You can find detailed information about the Fed's activities during the financial crisis and much more on the Board's website.

Our leaders speak frequently and substantively in public, and our chair responds directly to journalists' questions at regular news conferences. 

Supporting links
H.4.1: Factors Affecting Reserve Balances

Minutes of the Federal Open Market Committee - September 20–21, 2016

FOMC: Press Conference on September 21, 2016

Board of Governors 2015 Annual Report

Do Taxpayers Fund the Fed?

The Federal Reserve does not receive funding through the congressional budgetary process. The Fed's income comes primarily from the interest on government securities that it has acquired through open market operations. Other sources of income are the interest on foreign currency investments held by the Federal Reserve System; fees received for services provided to depository institutions, such as check clearing, funds transfers, and automated clearinghouse operations; and interest on loans to depository institutions.

Federal Reserve Banks are not operated for a profit. After covering expenses, which are regularly audited and made public in the Board's annual report, the Fed transfers any earnings to the U.S. Treasury. In 2016, that amount was $92.7 billion.

Supporting links
Federal Reserve Board announces Reserve Bank income and expense data and transfers to the Treasury for 2016 - January 10, 2017

What does it mean that the Federal Reserve is "independent within the government"?