Before the creation of our country’s Federal Reserve, the Congress implemented various short-lived experiments to illustrate the distinct views held by the public, regarding the execution of monetary policy and the working of the financial system. During that time, the outcome of these experiments was considered very alarming as in the background, our economy was facing one serious financial crisis after another. This further resulted in the paralyzing of our entire financial industry and also brought an abrupt stop to our once-booming economy. To counter this, Congress enacted the Federal Reserve Act of 1913. This Act resulted in the formation of the Federal Reserve System in the United States. According to me, the ideal role of the Federal Reserve System is to constantly develop and maintain a healthy and efficient monetary system, with its primary goal of maintaining stable prices and maximum employment. As of today, the Federal Reserve system is divided into four parts: a central authority network termed as the Board of Governors, a decentralized network of twelve Federal Reserve banks, the Federal Open Market Committee (FOMC) and the Federal Advisory Council (FAC).

The Board of Governors is the main governing body of the Federal Reserve System. The board comprises seven members. They are generally nominated by the President and are confirmed by the Senate, for a tenure of fourteen years. One term begins every two years, starting on February 1 of even-numbered years. A member who serves an entire tenure cannot get reappointed in the future. Also, a member who completes an unexpired portion of a term can get reappointed. All the terms end on their statutory date, regardless of the date on which the member is sworn in to their respective office. The Board’s main aim is to analyze both the domestic and international economic developments and also to align the Federal Funds Rate with the target set up by the FOMC. The Board also supervises and regulates the operations of the Federal Reserve Banks. They are also responsible for our country’s payments system and they generally overlook and administer most of the consumer credit protection laws of our country.

The twelve regional Federal Reserve Banks were established by Congress, as the operating arms of the nation's central banking system. They essentially carry out the regular, day to day operations like holding the cash reserves of depository institutions and setting the monetary policy. They move the currency and coin into and out of circulation and further, collect and process millions of checks each day. They provide checking accounts for the Treasury, issue and redeem government securities, and act in other ways as a fiscal agent for the Government. The Reserve Banks participate in literally all of the primary activities responsible for the functioning of the Federal Reserve System. Their board of directors come from various commercial financial organizations, which are also a member of the Fed, and also some certain and proficient individuals who represent each of their very own districts. Each President of these banks is appointed by the Board of Governors. Figure 1 shows the regions.

Figure 1: Regional Federal Reserve Banks

The Federal Open Market Committee (FOMC) is the Fed’s monetary policymaking body. It consists of twelve members—the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. It is very much responsible for open market operations. It is scheduled to meet several times a year to discuss whether to maintain or change any current economic policy. Generally, the FOMC sets the targeted Federal Funds Rate. Below is a graph depicting the Federal Funds Rate from the previous years. 

Figure 2: Federal Funds Target Rate

The Federal Advisory Council is an organization composed of the representatives elected by the twelve Federal Reserve Banks. Their aim is to deal with all the matters existing within the board’s jurisdiction. The council and the Board of Governors discuss current financial and business conditions and make recommendations for potential policy changes. The council does research for the Board of Governors. The council doesn’t have the authority to make policies, but its input and advice do influence matters that are within the Board of Governors’ jurisdiction.

To begin with, The Fed should possess certain independence as it will result in proper decision making, which is very much essential for the execution of monetary policy. But it also should be constantly regulated by the government. Transparency is vital in ensuring accountability to the public. And for the ideal structure, there are some amendments required in the election procedures. The power of electing individuals to these higher ranks shouldn’t be all concentrated at one end only. The term of the Chairman should be conterminous with that of the President’s tenure. There should be another district in the western region, to operate a branch of the Federal Reserve Bank like the one in San Francisco is governing the entire western region, even including the states of Alaska and Hawaii. Further, the Fed should develop some conditions to check how big companies and financial institutions adapt and are vulnerable to sudden funding shocks and liquidity shocks. They should further overlook all the assets and capital owned by the U.S branches of the foreign banks. The Fed is way too friendly with the big banks, and that should be seriously regulated. It might be because of the importance of these institutions towards the whole economy. These banks are literally classified as “too big to fail”.

The Fed should try to act as ethically as possible, and it should also increase the reserve requirement ratio so that during the crisis, it can easily bail out the commercial banks in trouble. 

Figure 3: The Federal Reserve System

My main aim to write this article was to help in explaining the fundamental workings of an institution, as crucial as the Fed, whose decisions impact our daily lives to the very core. With all its arsenal, the Fed was able to combat the aftermath of the financial crisis of 2008. Great efficiency and proper decision making resulted in the lowering of the unemployment rate, which is at a low of around 3.6%. Meanwhile, the inflation rate is stable at around 1.8%. The Fed has more power and influence on financial markets than any other legislative entity. Today, the Fed’s prime objective should always be to act ethically and try to steer the economy in the right direction. It should also try to reduce income inequality among the masses. Below are the graphs associated with the inflation rate and the unemployment rate, years from the end of the Recession.

Figure 4: Fed Mandate for Price Stability

Figure 5: Fed Mandate for Maximum Employment

Chen, J. (2019, November 18). Federal Reserve System. Retrieved from https://www.investopedia.com/terms/f/federalreservebank.asp.

Beattie, A. (2019, November 18). How The Federal Reserve Was Formed. Retrieved from https://www.investopedia.com/articles/economics/08/federal-reserve.asp.

Current US Inflation Rates: 2009-2019. (2019, November 13). Retrieved from https://www.usinflationcalculator.com/inflation/current-inflation-rates/.

United States Unemployment Rate. (n.d.). Retrieved from https://tradingeconomics.com/united-states/unemployment-rate.