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5 Things You Should Know About the Federal Reserve

This little-understood institution arguably has more power over American economics than Congress or the President.

Image of the Federal Reserve Headquarters building in Washington D.C.

The Federal Reserve has an enormous amount of power — arguably, more than the President or even Congress — on the day-to-day economic lives of American citizens.

The Federal Reserve’s policies govern how much money is printed (which impact inflation rates), how much it costs to lend money, which greatly effects the job market and personal finances, and buys and sells securities issued by the U.S. government.

Here are 7 things you should know about the Federal Reserve.

The Federal Reserve is a “quasi-government” institution, i.e., it’s not truly part of the government

The Federal Reserve, also known as the Fed, is a central banking system that serves as the main monetary authority in the United States. It is not a government agency or department, but it is an independent entity that operates within the government.

The Fed is responsible for implementing monetary policy, regulating banks and other financial institutions, and providing financial services to the government. It is a “quasi-public” institution, meaning that it is not entirely private but also not a fully public entity.

The Fed is governed by a board of directors. The chair of the board — currently held by Jerome Powell, or as the internet likes to call him, “J. Pow” — is appointed by the President of the United States with the advice and consent of the Senate.

Overriding the Constitution, the Federal Reserve is the only entity allowed to create currency — not the government

The Federal Reserve has the exclusive authority to issue and produce currency in the United States. The U.S. Constitution grants Congress the power to coin money and regulate the value thereof.

Article I, Section 8, Clause 5:

[The Congress shall have Power . . . ] To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures; . . .

But in 1913, Congress delegated this power to the Fed via the Federal Reserve Act of 1913. The Fed is responsible for producing and distributing physical currency, as well as for issuing and redeeming paper money.

As such, the U.S. government does not have the authority to print currency. However, the government does have the authority to mint coins and issue securities, such as Treasury bills, notes, and bonds. These securities are not considered currency. But they can be used as a means of payment and are widely accepted as a store of value.

The Fed and the government work together to manage the supply of currency in circulation and to ensure that the financial system functions smoothly. The Fed is responsible for implementing monetary policy and regulating the supply of money, while the government is responsible for issuing and managing the national debt and other financial obligations.

Is the Federal Reserve constitutional?

The constitutionality of the Fed has been challenged at various times, but the Supreme Court has consistently upheld the constitutionality of the Fed and the Federal Reserve Act.

The U.S. Constitution grants Congress the power to coin money and regulate the value thereof, and Congress has delegated this power to the Fed through the Federal Reserve Act. The Supreme Court has ruled that the Fed is a constitutional exercise of Congress’ power to coin money and regulate the value thereof.

Moreover, the courts have gone even further in protecting and even empowering the Federal Reserve

Who is on the board of governance of the Federal Reserve?

The Federal Reserve, or the Fed, is governed by a seven-member board of directors, and . The board is responsible for setting the direction of the Fed and overseeing its operations. The board is made up of the following members:

  1. The chair of the board: The chair is the head of the Fed and is responsible for representing the Fed to Congress and to the public. The chair is appointed by the President of the United States with the advice and consent of the Senate. In 2022, the chair of the board is Jerome Powell, who was appointed by Donald Trump in 2018.
  2. The vice chair of the board: The vice chair is responsible for representing the Fed in the chair’s absence and for assisting the chair in the execution of their duties. The vice chair is also appointed by the President with the advice and consent of the Senate. Today, the vice chair of the board is Lael Brainard.
  3. Four other board members: These members are appointed by the President with the advice and consent of the Senate for a term of 14 years. They are responsible for participating in the formulation of monetary policy and for overseeing the operations of the Fed. These four chairs are currently held by: Michael S. Barr, Michelle W. Bowman, Susan M. Collins, Lisa D. Cook, Phillip N. Jefferson, Christophe J. Waller.
  4. The president of the Federal Reserve Bank of New York: The president of the New York Fed is a permanent member of the board and is responsible for representing the interests of the 12 Federal Reserve Banks. Currently this position is held by John Carroll Williams

The board is also advised from an additional 11 directors of regional banks around the country from Chicago, Philadelphia, St. Louis, Boston, Philadelphia, Cleveland, Richmond, Atlanta, Dallas, Minneapolis, Kansas City, and San Francisco.

The Federal Reserve Is Really the “Fourth Branch of Government”

Though it doesn’t get nearly as much attention as the Executive, Legislative, and Judicial branches of government, the Federal Reserve has much in common with them.

Like the Supreme Court, board members are nominated by the president and confirmed by the Senate. Though these nominations tends to get less publicity than Supreme Court justices, they can get just as heated and political.

When Biden put his Federal Reserve nominations forward, nominee Sarah Raskin was stonewalled by by the GOP much like Merrick Garland was during his Supreme Court nomination.

The GOP was concerned that Raskin would use her position to influence large banks to move away from fossil fuel-centric investments and put more of a focus on climate change. Senators from heavily fossil-fuel industry dependent states took a hardline stance against her, and Raskin withdrew her candidacy.

Where investment goes, politics inevitably go with it. Because the Federal Reserve has significant influence over banking practices nationwide, Federal Reserve nominees and confirmations are just as contentious and significant and Supreme Court nominations on the fabric of American life.

Author

  • Tanja Fijalkowski

    Tanja Fijalkowski is an award-winning writer, editor, and designer. A North Bay Area native, she has written for various financial, business, history, and science publications. She's a deep-dive researcher with a strong command of data analysis and simplifying complex concepts.

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