The Fed Pyramid

The graph to the right provides an overview of this Fed pyramid. For a little insight into the structure of the Federal Reserve System, consider a few the numbers. Use the mouse arrow to highlight the assorted components of the Fed pyramid.

• 1: At the very, VERY top of this pyramid is the Chairman of the Board of Governors, the one person who runs the show, who has the power, who calls the shots.


• 7: At the very top of this pyramid is the Board of Governors, consisting of 7 folks (including the Chairman), usually economists by training, who make the big decisions.


• 37: The middle of the pyramid is occupied by Federal Reserve Banks. These 37 banks dispersed throughout the country, include 12 District Banks and 25 Branch Banks interact directly with commercial banks and are primarily responsible for carrying out the actions of the Fed.


• 20,000: At the bottom of the pyramid are the economy's commercial banks, including traditional banks, savings and loan associations, credit unions, and mutual savings banks. While the number changes over time from mergers, closings, new start-ups and the like, the total number of establishments is in the range of about 20,000.


• 300 Million: Beneath the pyramid, the foundation upon which the pyramid is built, is the public, the non-bank public to be precise. This includes people, businesses, and even government agencies that make use of commercial banking services.


• 2 Times 12: Note the two ovals to the side of the pyramid. Each oval is comprised of 12 members. The 12 residing in the oval labeled Federal Open Market Committee are critical to the Federal Reserve's money-supply control. The 12 occupying the other oval labeled Federal Advisory Council are not quite as important, but still worth noting.

Chairman

The Chairman is appointed to a 4-year term, using the Presidential appointment, Senate confirmation process. While the 4-year term of the Chairman is the same length of the 4-year presidential term, most presidents tend to inherit the Chairman appointed by a predecessor. The Chairman is also one of the 7 governors serving a regular 14-year term.

When the Federal Reserve System was created, the Chairman was little more than a figure head, the guy with the gavel who presided over Board meetings. (The actual power rested with the President of the New York Federal Reserve Bank.) However, the Chairman is now one of the most powerful economic positions in the United States and even the world. The wishes and policies of the Chairman need not be approved by the rest of the Board, but they typically are.

Board Of Governors

The Board of Governors is comprised of 7 members who are appointed by the President and approved by the Senate. The composition and structure of the Board of Governors is designed, like the rest of the Federal Reserve System, for independence from the President and Congress. The job of the Fed is to carry out policies deemed best for the economy; policies that might not necessarily be to the liking of the President or Congress.

This independence is helped by appointing Governors to staggered terms. Each member of the Board, like any other federal appointees, is appointed by the President and approved by the Senate. Each of the 7 governors is appointed to a 14-year term, with terms staggered every two years. In other words, one term is filled this year, another in two years, and another two years after that. After 14 years, the first term comes up for appointment again.

This system of staggered terms is designed to keep the President from appointing the entire Board. The Board is NOT suppose to work for the President or carry out Presidential policies. With staggered, 14-year terms, a president can normally appoint no more than 3 Governors during an 8-year stay in office, preventing the appointees of the sitting President from having a voting majority.

In addition to staggered 14 year terms, the overall makeup of the Board of Governors involves several general criteria:

• First, no two members can be from the same Federal Reserve District. This ensures that 7 of the 12 Federal Reserve Districts are represented on the Board.


• Second, no member can serve two complete terms. In general, a member is appointed to serve a single 14-year term. However, this criterion allows a member to finish out a the remaining years of a term vacated by a predecessor then serve one complete 14-year term.


• Third, in addition to dispersion across districts, the composition of the Board of Governors is further constructed to represent the geographic divisions of the country.


• Fourth, the composition of the Board of Governors also is constructed to represent the varied interests of the country--financial, agricultural, industrial, and commercial. This is intended to prevent the board from containing ONLY members with experience in the financial industry.

Federal Open Market Committee

The Federal Open Market Committee is a standing committee of the Federal Reserve System that is specifically charged with conducting open market operations and is more generally responsible for guiding monetary policy.

The FOMC is comprised of the 7 members of the Board of Governors, including the Chairman, and 5 Federal Reserve District Bank presidents. The Chairman of the Board of Governors is also the Chairman of the Federal Open Market Committee.

Because the Fed's monetary policies are conducted through financial markets centered in New York City, the President of the New York Federal Reserve Bank is always on this committee. The remaining 4 slots are shared and rotated among the remaining 11 District Banks. One slot is shared by Boston and Philadelphia. Another is shared by Dallas, Atlanta, and Kansas City. A third by Cleveland, Chicago, and Richmond. And the fourth by San Francisco, Minneapolis, and St. Louis.

The 7 + 1 + 4 composition keeps the bulk of authority and power in the hands of the Board of Governors and the Chairman (the 7), while at the same time maintaining a channel for implementing monetary policy through the New York Federal Reserve Bank (the 1), as well as providing a decentralized nationwide input from the rest of the country through other Federal Reserve District Banks (the 4).

Federal Advisory Council

The Federal Advisory Council consists of the Presidents from 12 commercial banks, one from each of the 12 Federal Reserve Districts. These commercial bank presidents reach the council through selection by their friendly neighborhood Federal Reserve District Bank.

The FAC is totally advisory. It does not set policy. It does not impose regulations. All it does is offer advice to the Board of Governors. The main function of the FAC is to provide feedback from commercial banks, and presumably their customers, about Fed policies.

Federal Reserve Banks

Federal Reserve Banks include 12 District Banks and 25 Branch Banks that are largely responsible for supervising, regulating, and interacting with commercial banks and carrying out the policies established by the Federal Reserve Board of Governors. The 12 District Banks are located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. The 25 Branch Banks are dispersed throughout the country, with all but the Boston district having at least one Branch Bank. The Branch Banks surface in such cities as Miami, Los Angeles, Denver, New Orleans, and Oklahoma City.

The primary task of Federal Reserve Banks is keep the commercial bank system in operation. The do this through regulatory oversight of banking activities and through the provision of banking services, such as deposits and emergency loans. Federal Reserve Banks also process checks and electronic transactions for commercial banks through a centralized clearing house.

Federal Reserve Banks are the portal for getting currency into circulation. Newly printed currency is sent to the Federal Reserve Banks, which then send the currency to commercial banks. In addition, Federal Reserve Banks are responsible for monitoring their district economies. They collect data, do studies, and hold seminars. Federal Reserve Banks even offer a few limited services to the public. The public can go to a Federal Reserve Bank to buy savings bonds, bid for U.S. Treasury securities, or exchange U.S. currency for foreign currency.

Commercial Banks

Traditional banks are historically categorized as either national or state, depending on the government authorizing the bank's charter. National banks are chartered by the federal Comptroller of the Currency and state banks are chartered by state governments. National banks are automatically members of the Federal Reserve System. State banks can choose whether or not to join the Federal Reserve System. Some do, some do not.

Non-Bank Public