The U.S. Federal Reserve System, also known as the “Fed,” has become an ever-present subject of news and financial media headlines for much of the 2020s and various times throughout history. And with 2025 seeing more acute coverage of the Fed, we thought it apt to provide some relevant facts and historical context for how the Fed came to be and its purpose.
How did the Fed come to be?
The Fed serves as the country's central bank and was created by the Federal Reserve Act of 1913, which was passed by Congress in response to early 20th century financial crises. It’s goal then and now is in large part to help the U.S. avoid and manage undue stress to the country’s financial system. In the decades that followed, key legislation was introduced that established the Federal Open Market Committee to centralize monetary policy decision-making (Glass-Steagall Act of 1933 & Banking Act of 1935) and gain political independence (Treasury-Federal Reserve Accord of 1951).
What is the Fed’s role?
The Federal Reserve Act first established the Fed’s primary purpose: maximize employment and stabilize prices. Said another way, the Fed’s job is to ensure that our economy operates in such a way where the average American can be gainfully employed and be able to afford goods and services. Setting interest rates and monetary policy are the Fed’s primary tools to accomplish that balance. But most people don’t realize that the Fed’s job doesn’t stop there. In addition, the Fed is responsible for:
- Supervision & Regulation: promotes safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole.
- Payment Systems: promotes a safe, efficient, and accessible system for U.S. dollar transactions.
- Consumers & Communities: advances supervision and research to improve understanding of the impacts of financial services policies on consumers and communities.
How is the Fed structured?
The Fed, although it’s often referred to as a singular entity, is truly a multi-layered system that’s worth reviewing.
The Fed is comprised of 12 regional reserve banks each with its own bank president who is selected by each respective bank’s board of directors and approved by the Federal Reserve Board of Governors for a five-year term. The terms of each bank president run concurrently with each other and are set to expire on the last day of February during years ending in 1 and 6 (e.g., 2026 and 2031). Bank presidents are eligible for reappointment but are typically forced to retire at the age of 65.
In addition to serving key lending and regulatory functions within their regions, regional banks also collect and provide a wealth of data and analysis that’s then used to inform the country’s collective monetary policy.
Overseeing the regional reserve banks is the seven-member Federal Reserve Board of Governors (FRB), each of whom are nominated by the President and confirmed by the Senate. While each member serves a staggered 14-year term, the President also nominates a Chair, Vice Chair, and Vice Chair for Supervision to one or more four-year terms not to exceed the overall 14-year term limit.
How are interest rates set?
The Federal Open Market Committee (FOMC) is the entity within the Fed that sets the federal funds rate, which is the overnight interest rate that banks charge one another when lending money. The 19-member FOMC consists of 12 voting members:
- All seven Board of Governors
- The president of the Federal Reserve Bank of New York
- An annually rotating set of four of the remaining 11 Reserve Bank presidents
During each of the eight or more times a year the FOMC meets to vote on potential changes to the federal funds rate, the remaining seven Reserve Bank presidents attend in a non-voting capacity to participate in discussions.
Voting, consensus, and dissent
The FOMC Chair, which is typically the same person who serves as the Chair of the Board of Governors, has one equal vote relative to the rest of the voting members and does not possess any sort of special voting rights or veto powers. However, the FOMC Chair is tasked with leading the committee deliberations and seeking consensus on a policy decision. In the case of a tie vote, which has never happened, the FOMC Rules and Authorization don’t specifically spell out what happens next. It is our understanding that there is no tie breaking effort, and the policy remains unchanged.
While reaching a consensus is the preferred outcome following FOMC meetings meaning that all 12 voting members have similar views of the current state of the economy and its expected future path, dissenting votes, while somewhat rare, can occur. Dissenting votes usually occur during periods of heightened economic uncertainty and/or where Fed officials believe maintaining low inflation and maximizing employment may come at odds with one another. Dissent can also simply represent diversity of opinion and is a sign that the committee is not succumbing to a group-think mentality.
Maintaining independence
For the last 75 years, the Fed has been able to serve its role in large part because of its ability to operate independently from the pressures of the public and private sectors. Without this autonomy, the Fed would likely lose its most important trait: credibility. If the general public thought that the Fed was likely to cave to the pressures of outside interests at the cost of failing to adhere to its primary dual mandate of maintaining low inflation and low unemployment, the economic consequences could be severe.
But this level of autonomy does not come without embedded checks and balances. The relatively complex, layered structure of the Fed, how various officials are appointed, the length of their terms, the shared responsibilities, and the heightened cost of acting inappropriately are, at a high level, what shapes the Fed and its actions.
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