Board Of Governors

The exhibit to the right, commonly termed the Federal Reserve pyramid, indicates the connection between the Board of Governors and the rest of the Federal Reserve System. As the governing body, the Federal Reserve Board (and its Chairman) is positioned at the top of the pyramid, above Federal Reserve Banks, commercial banks, and the non-bank public.

The Monetary Authority

• Bank Regulation: A primary function of the Federal Reserve Board (along with the Federal Deposit Insurance Corporation and Comptroller of the Currency) is the regulation of the commercial banking system. The Board establishes and oversees policies designed to keep banks financially sound and to prevent banks from using market control to take advantage of the consuming public. The financial institutions under Board control include both member banks and nonmember banks, bank holding companies, foreign banks operating in the United States, and Edge Act corporations engaged in international activities.
  
  The Board keeps a watchful regulatory eye on these institutions to ensure that they maintain sufficient reserves to remain in business (and thus keep the money supply and other liquid assets sound). Its policy control over reserve requirements and margin requirements are two means to this end. The Board also regulates financial institutions on to protect consumer credit through the Truth in Lending Act, Equal Credit Opportunity Act, Home Mortgage Disclosure Act, and Truth in Savings Act.
  
  The Board is responsible for supervising the activities of the 37 Federal Reserve Banks, as well. The 12 Federal Reserve District Banks have a fair degree of autonomy within their districts in terms of supervising commercial banks, conducting research, hiring employees, etc. However, they must abide by Federal Reserve Board guidelines and policies.


• Monetary Policy Tools: The Board has a significant role in all three tools of monetary policy--reserve requirements, discount rate, and open market operations. First, as part of its regulation of commercial banks, the Federal Reserve Board has complete authority over reserve requirements. Second, while the discount rate is actually set by the Federal Reserve Banks, any changes must be approved by the Federal Reserve Board. Third, the Board of Governors forms the voting majority of the Federal Open Market Committee, which is responsible for open market operations.


• Payments System: The Federal Reserve Board also supervises and regulates the payments system for clearing checks and making electronic payments. A vast majority of automatic payments (use for such things as payroll checks, loan payments, insurance premiums) go through the Fed's Automated Clearinghouse (ACH) operated by Federal Reserve Banks and supervised by Board. The Board also supervises the Fed's check clearing service used to process checks written on one bank and deposited in another. Not only does the Board supervise the Fed's own payment system, it regulates payments systems operated by private parties.

An Exclusive, Diverse Club

Each member of the Federal Reserve Board, like other federal positions, is appointed by the President and confirmed by the Senate. The President also selects one member to serve as Chairman and one to serve as Vice Chairman, each having a 4-year term. These appointments are also subject to confirmation by the Senate. No member of the Federal Reserve Board can serve two complete 14-year terms. In general, a member is appointed to serve a single term. However, a member can finish out the remaining years of a term vacated by a predecessor, then be appointed to serve one complete 14-year term.

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. Geographic variety is also achieved with no two members able to come from the same Federal Reserve District. This ensures that 7 of the 12 Federal Reserve Districts, not just the New York district, are represented on the Board at any given time.

Political Independence

This independence is helped in several ways.

• First, the system of appointing the 7 governors to staggered 14-year term 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, as is the case for Cabinet-level Departments (Defense, Education, State, Transportation, etc.). In principle, the staggered 14-year terms mean a president can appoint only 2 Governors during a 4-year term. And while an 8-year stay in office can result in a majority of 4 Governors appointed by a particular President, this majority would exist only for the last 9 months of the administration (February through October).


• Second, the Federal Reserve Board is NOT dependent on Congressional appropriations for its funding. The Board generates operating revenue from fees charged for services (especially clearing checks), interest charged on loans to commercial banks, and interest generated from a sizeable portfolio of U.S. Treasury securities that it holds. This budgetary independence means Congress cannot use appropriations as a carrot or a stick to encourage particular actions by the Board (which it is inclined to do with other federal government agencies).


• Third, once a Governor is appointed to the Board, he or she cannot be removed for political reasons. That is, the Chairman, the Vice Chairman, and the remaining 5 members are free to express their political views and vote their philosophical consciences without fear of job termination by the President. The same cannot be said for strictly political appointees, such as the Secretary of the Treasury, the Under Secretary of Defense, or the Head of the Environmental Protection Agency, who are charged with carrying out the policies of the President.

Independent, But Not Isolated

The Chairman, for example, regularly meets with the Chairman of the Council of Economic Advisors and the Secretary of the Treasury to discuss the state of the economy and any needed policy actions. The Board works closely with the Federal Deposit Insurance Corporation, Comptroller of the Currency, and National Credit Union Administration to regulate commercial banks. Members regularly testify before assorted Congressional committees on macroeconomic policy, consumer protection laws, banking regulation, and other matters affecting the financial markets and the economy.

By law, the Federal Reserve Board submits a report on monetary policy and the state of the economy to Congress twice a year. The Chairman regularly testifies before Congress on these reports and other topics of economic importance. And, of course, the Chairman privately meets with the President and Congressional leaders.

While the Fed and the Federal Reserve Board do not receive appropriations from Congress, they are subject to annual auditing by the Government Accountability Office (formerly the General Accounting Office) as well as a public accounting firm.

Advisory Councils

• Federal Advisory Council: This council is comprised of 12 members, one from each of the 12 Federal Reserve Districts. A council member, typically a commercial bank president operating in the district, is appointed by the Federal Reserve District Bank and serves three one-year terms. The Federal Advisory Council (FAC) meets with the Federal Reserve Board at least four times a year, generally the first Friday in February, May, September, and December, to discuss any and all issues relevant to the Federal Reserve System.


• Consumer Advisory Council: Advice on credit consumer protection activities of the Federal Reserve Board is offered by this council of 30 members. The Consumer Advisory Council (CAC) was established in 1976 and contains members who represent consumers and financial groups, including both academicians and legal specialists with knowledge of consumer affairs. Members serve staggered 3 year terms. The council meets with the Federal Reserve Board three times a year


• Thrift Institutions Advisory Council: This advisory council was established in 1980 when the Federal Reserve System extended regulatory oversight to thrift institutions (savings and loan associations, credit unions, and mutual savings banks). The Thrift Institutions Advisory Council (TIAC) contains 12 members, each serving for 2 years, who represent the interests of savings and loan associations, credit unions, and mutual savings banks. The council meets with the Federal Reserve Board 3 times a year to discuss the special needs and concerns of thrift institutions.

Federal Open Market Committee

Because New York City is the financial center of the country, the President of the New York Federal Reserve Bank is always on this committee and is invariable the Vice Chairman of the FOMC. The New York Federal Reserve Bank is charged with carrying out specific policy actions. 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. Actually the Presidents of all 12 Federal Reserve District Banks are present at committee meetings, but only 5 are able to vote at any given time.

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).