The Federal Reserve System is an independent entity within the government. It operates autonomously within a framework of economic and financial policy objectives established by the government. Although its decisions are not ratified by the executive branch, it is subject to congressional oversight. For instance, its Chairman periodically reports to Congress.
Its structure was designed by Congress to provide a broad perspective on economic activity in all parts of the country and to create a balance between public and private control.
It has four major components:
- Twelve individually chartered corporations called Federal Reserve Banks
- Member commercial banks in each district that contribute capital to the Reserve Banks and receive dividends
- The Board of Governors of the Federal Reserve System, a federal agency that exercises general supervision over the Reserve Banks
- The Federal Open Market Committee, the main body for carrying out monetary policy.
The Federal Reserve System is made up of twelve districts or service areas. Each district has an office in a major financial center; most have branch offices as well, for a total of 25 branches nationwide.
Each of the twelve Federal Reserve Banks is separately incorporated, and each has its own president and board of directors. Presidents are appointed to five-year terms by a bank’s board of directors. Each branch office also has its own board of directors.
The directors serve three-year terms and represent the various sectors of the economy, including business and industry, agriculture, finance, labor, and consumers.
Although the Reserve Banks were created by legislative act, they receive no budget appropriations from Congress. Each of them is self-sufficient, earning income from interest on holdings of U.S. Treasury securities, from interest on loans to depository financial institutions, and from fees for the services provided to those institutions.
Reserve Banks’ stock is owned entirely by the commercial banks that are members of the Federal Reserve System. Dividends are paid to stockholders semiannually at a fixed rate of 6 percent.
At the end of each year, Reserve Banks return to the U.S. Treasury all earnings in excess of operating expenses.