Question

How does the Federal Reserve System differ from the Central bank in USA?

Answer 1

The Federal Reserve System (FRS) is the central bank of the United States. The Fed, as it is commonly known, regulates the U.S. monetary and financial system. The Federal Reserve System is composed of a central governmental agency in Washington, D.C., the Board of Governors, and 12 regional Federal Reserve Banks in major cities throughout the United States. The Federal Reserve performs five general functions: conducting the nation's monetary policy, regulating banking institutions, monitoring and protecting the credit rights of consumers, maintaining the stability of the financial system, and providing financial services to the U.S. government. The Fed also operates three wholesale payment systems: the Fedwire Funds Service, the Fedwire Securities Service, and the National Settlement Service.

The Federal Reserve, unlike most central banks, is semi-decentralized. At the national level, it is run by a Board of Governors, consisting of seven members appointed by the President of the United States and confirmed by the Senate. Appointments are for 14-year terms and they are arranged so that one term expires January 31 of every even-numbered year. The purpose of the long and staggered terms is to insulate the Board of Governors as much as possible from political pressure so that policy decisions can be made based only on their economic merits. Additionally, except when filling an unfinished term, each member only serves one term, further insulating decision-making from politics. Policy decisions of the Fed do not require congressional approval, and the President cannot ask for the resignation of a Federal Reserve Governor as the President can with cabinet positions.

The Federal Reserve is more than the Board of Governors. The Fed also includes 12 regional Federal Reserve banks, each of which is responsible for supporting the commercial banks and economy generally in its district.

The Federal Reserve, like most central banks, is designed to perform three important functions:

1. To provide banking services to commercial banks and other depository institutions, and to provide banking services to the federal government.
2. To promote stability of the financial system
3. To conduct monetary policy

The Federal Reserve is sometimes called a “banker’s bank.” The reason for this is that the Fed provides many of the same services to banks as banks provide to their customers. For example, all commercial banks have an account at the Fed where they deposit reserves. In fact, most of a commercial bank’s reserves are not held on the premises; rather, they are held at their regional Federal Reserve bank. Banks can also obtain loans from the Fed through the “discount window” facility, which will be discussed in more detail later. Additionally, the Fed is responsible for check processing. When you write a check, for example, to buy groceries, the grocery store deposits the check in its bank account. Then, the physical check (or an image of that actual check) is returned to your bank, after which funds are transferred from your bank account to the account of the grocery store. The Fed is responsible for each of these actions.

On a more mundane level, the Federal Reserve ensures that enough currency and coins are circulating through the financial system to meet public demands.

Finally, the Fed is responsible for assuring that banks are in compliance with a wide variety of consumer protection laws. For example, banks are forbidden from discriminating on the basis of age, race, sex, or marital status. Banks are also required to disclose publicly information about the loans they make for buying houses and how those loans are distributed geographically, as well as by sex and race of the loan applicants