Although the Federal Reserve is often in the news, not everyone understands what it is and what it does. Perhaps the best way to clear things up is to have a Federal Reserve “Q & A” to cover some of the most common questions that people ask.
What is the Federal Reserve?
It is the central banking system of the United States.
What does it do?
The short answer is that the Federal Reserve is:
• a bank for other banks,
• a bank for the U.S. government, and
• responsible for U.S. monetary policy, which influences
how much money and credit will be available to the U.S. economy.
It also helps to:
• supervise and regulate banking institutions to ensure the safety
and soundness of the nation’s banking and financial system
• protect the credit rights of consumers, and
• maintain the stability of the financial system by helping to
contain risks that may arise in financial markets.
When was the Federal Reserve established? Congress created the Federal Reserve System in 1913 to help make the U.S. banking system safer and more efficient.
How many Federal Reserve Banks are there?
There are twelve Federal Reserve Banks. Each of the twelve Reserve Banks serves its own Federal Reserve District.
Where is the headquarters for the Federal Reserve?
The System’s headquarters is in Washington, D.C. It is called the Board of Governors of the Federal Reserve System.
Does the Federal Reserve lend money to businesses and consumers?
No. The Federal Reserve does not lend money to private borrowers, but it sometimes lends money to banks when the need arises.
Does the Federal Reserve print U.S. paper money?
No. Although Federal Reserve Notes account for almost 100 percent of the U.S. paper money in circulation, the notes are actually printed by the Bureau of Engraving and Printing, which
is part of the U.S. Treasury Department. The paper money is then shipped to the Federal Reserve Banks and their branches. When banks need cash for their customers’ needs, they order it from the Federal Reserve Bank in their District. Also, since money gradually wears out, the Federal Reserve Banks process cash in order to determine its fitness. Worn out bills are
shredded; new bills are introduced into the system to replace the old ones.
Do all Federal Reserve Banks store gold bars in their vaults?
Only the Federal Reserve Bank of New York has a working gold vault, and almost all of the gold in its vault is foreign-owned. The U.S. government’s gold is held at Fort Knox, Kentucky, the U.S. Mints in Denver and Philadelphia, the San Francisco Assay Office of the U.S. Mint, and the U.S. Bullion Depository in West Point, New York.
Does the Federal Reserve process all the checks Americans write?
No. The Federal Reserve Banks handle less than one-third of all U.S. checks. Private entities process the rest.
Is the Federal Reserve responsible for regulating and supervising the entire U.S.
banking system?
No. It shares this responsibility with other federal and state regulatory agencies.
Does the Federal Reserve set interest rates?
The Federal Reserve is responsible for U.S. monetary policy. This means it makes policies that influence how much money and credit will be available to the U.S. economy. Interest rates often go up or down in response to the Federal Reserve’s monetary policy decisions, but only the discount rate is set directly by the Federal Reserve. The discount rate is the rate banks pay when they borrow from the Federal Reserve.
