Federal Reserve System summary

Federal Reserve System, U.S. central bank system consisting of 12 Federal Reserve districts with a Reserve bank in the principal commercial city of each district. The system is supervised by a board of governors in Washington, D.C., as well as by various advisory councils and committees. As a result of the Federal Reserve Act of 1913, all national banks are required to join the system; state banks may join if they meet membership qualifications. The Federal Reserve is responsible for monetary policy. The original act set fixed reserve requirements for the U.S. fractional reserve banking system. It allowed each district bank to determine its discount rate, the rate it charged on loans to member banks. The modern Federal Reserve resulted from the Federal Reserve Act of 1935, which allowed the board to determine reserve requirements within defined limits. It became responsible for approving the discount rates of the district banks. Most importantly, the act created the Federal Reserve Open Market Committee, which is responsible for conducting operations in financial markets that increase or decrease the amount of reserves in the system. If the Federal Reserve wants to ease monetary policy, it will use open market operations and increase the amount of reserves through the purchase of financial assets. Conversely, it can tighten monetary policy through the sale of financial assets.