• Board of Governors
• Reserve Banks
• Federal Open Market Committee
• Member Banks

The major components of the Federal Reserve System are the Board of Governors in Washington D.C. and 12 Federal Reserve Banks spread across the country.

The Board of Governors consists of seven members, who are appointed by the President of the United States and confirmed by the U.S. Senate. The Governors are appointed for 14-year terms, and the terms are staggered, one expires every two years. The length of the term and the staggered nature are designed to insulate the Fed from day-to-day political pressures.

The Fed is financially self-sufficient which ensures its political independence. It does not depend on appropriations from the Congress. The Fed owns a large portfolio of U.S. government securities, and the interest from that portfolio provides the Fed enough income to carry out its activities. The Fed returns to the U.S. Treasury the excess of what it takes in over what it spends.

The Board of Governors also has the following responsibilities:

• Set the reserve requirements and approve the discount rate that the Reserve Banks recommend
• Exercise authority over the activities of the Reserve Banks
• Approve the annual budgets of the Banks
• Appoint three of the nine members of the board of directors of each Bank
• Approve the directors’ choice of a Bank president

The Board of Governors also issues a variety of regulations, some in the area of consumer protection, that apply not only to banks, but also to other lenders, such as retailers and finance companies.

The Board also publishes statistics and information about the Federal Reserve System’s activities and the U.S. economy.

There are 12 Reserve Banks spread across the country. The majority of these are concentrated in the eastern part of the United States. The Federal Reserve System was created in 1914 when the U.S. population and business activity was concentrated more in the East than is the case today.

All Reserve Banks, except those in Boston and Philadelphia, have branches that help them carry out their work. There are 25 branches in all.

The Board of Governors mainly carries out policy and supervisory functions, and the Reserve Banks and their branches carry out the operations of the Federal Reserve. While all of the Reserve Banks perform the bank supervisory and payment services, some activities are unique to particular Reserve Banks, especially the Federal Reserve Bank of New York.

The group that formulates the monetary policy for the Fed is the Federal Open Market Committee (FOMC). The FOMC meets in Washington D.C. eight times a year. The meetings are attended by the seven members of the Board of Governors and by all 12 Federal Reserve Bank presidents. However, there are only 12 voting members on the committee. They include the seven members of the Board and the presidents of five Federal Reserve Banks.

The president of the New York Fed is a permanent voting member of the FOMC and the presidents of the other Reserve Banks serve one-year terms as voting members on a rotation that is set by law.

Before each FOMC meeting, staff members at each Reserve Bank prepare a report on economic developments in their Bank’s district, and Board staff members prepare reports on the performance of the national economy. Monetary policy decisions are based on national, rather than local economic conditions. At the meeting, participants discuss economic developments and forecasts, conditions in the banking system, foreign exchange and financial markets.

At the end of 2006, about 2,000 banks were members of the Federal Reserve System. Banks chartered by the federal government, that is national banks, must belong to the System, while those chartered by state governments may choose to belong if they meet standards set by the Fed. While these member banks are less than half those in the country, they control three-fourths of the country’s bank deposits.

By law, all banks, whether members of the Federal Reserve System or not, must meet the Fed’s reserve requirements and may use the Fed’s services such as the discount window.

Member banks must buy stock in a prescribed amount in their local Reserve Bank, and they receive a 6 percent annual dividend on their stock. However, this stock cannot be traded and can be owned only by member banks.