Board of the Governors of the Federal Reserve System

The Federal Reserve System, the central bank of the United States, conducts the nation’s monetary policy, supervises and regulates banks, and provides a variety of financial services to the U.S. Government and to the nation’s banks.

  • The Board of Governors of the Federal Reserve System plays a major role in making U.S. monetary policy.
  • The seven members of the Board are appointed by the President of the United States for staggered 14-year terms.
  • The Board of Governors supervises the work of the Federal Reserve Banks and issues a variety of banking and consumer-credit regulations.

The Federal Reserve System, the central bank of the United States, conducts the nation’s monetary policy, supervises and regulates banks, and provides a variety of financial services to the U.S. Government and to the nation’s banks. The Federal Reserve System is supervised by the Board of Governors. Located in Washington, D.C., the Board is a Federal Government agency consisting of seven members appointed by the President of the United States and confirmed by the U.S. Senate. The Board has a staff of about 1,850 employees.

Monetary Policy Responsibilities
Most importantly, the Board plays a key role in the decisions of the Federal Open Market Committee (FOMC). The members of the Board of Governors have a majority (7 out of 12) of the votes on the FOMC, the arm of the Fed that determines the nation’s monetary policy. The five other votes belong to the president of the Federal Reserve Bank of New York—it is the New York Fed that conducts the open market operations to implement the FOMC’s monetary policy—and four other Reserve Bank presidents, who serve one-year terms as voting members of the FOMC on a rotating basis. The Chairman of the Board of Governors serves as Chairman of the FOMC.

The Board has other monetary policy responsibilities as well. The Monetary Control Act of 1980 gives the Board the authority to set a reserve requirement of from 8% to 14% on transaction deposits (that is, deposits in checking and other accounts from which transfers can be made to third parties) and of up to 9% on non-personal time deposits (that is, deposits not held by an individual or sole proprietorship). In April 2007, the reserve requirement was 10% on transaction deposits and 0% on time deposits.

The Board also approves the discount rate (the interest rate at which Federal Reserve Banks extend short-term loans to depository institutions) that is recommended by the board of directors of each of the 12 Federal Reserve Banks. Because the credit market is national, the rate approved by the Board has, for decades, been the same for all of the Reserve Banks.

Other Responsibilities
The Board supervises the activities of the Reserve Banks, approves the Reserve Banks’ annual budgets, appoints three of the nine directors of each Reserve Bank (the others are elected by the commercial banks in the Reserve Bank’s District that are members of the Federal Reserve System), and approves the candidate for Bank president recommended by the directors of each Reserve Bank. The Board of Governors also approves major Reserve Bank expenditures, such as those for the construction of buildings and the salaries of Reserve Bank presidents.

The Board of Governors plays a major role in banking supervision, which entails the examination of depository institutions for safety and soundness and for compliance with laws and regulations. The Board’s supervisory responsibilities extend to all bank holding companies, state-chartered banks that are members of the Federal Reserve System, and Edge Act and agreement corporations through which U.S. banks conduct operations abroad. In addition, the Board also oversees the activities of the U.S. branches of foreign banks. While the Board determines bank supervision policy, it delegates the task of conducting the examinations to the 12 Reserve Banks.

The Board also publishes a wealth of statistics and other information about the Federal Reserve and about the U.S. economy. For example, the data on industrial production, one of the country’s major macroeconomic indicators, are published by the Board.

Appointments to the Board
By law, the President of the United States must make appointments to the Board that yield a "fair representation of the financial, agricultural, industrial, and commercial interests and geographical divisions of the country." The country is divided into 12 Federal Reserve Districts, and no two Governors may come from the same District.

The Governors are appointed for 14 years, and the terms are staggered, with one expiring on January 31 of every even-numbered year. A Governor who has served a full 14-year term may not be reappointed, but someone who was appointed to complete an unexpired term may be reappointed to a full 14-year term. Once appointed, Governors cannot be removed from office for their policy views. The length of the terms and the staggered appointments process are intended to contribute to the insulation of the Board—and the Federal Reserve System—from day-to-day political pressures to which it might otherwise be subject. If all Governors serve full terms, a U.S. President would be able to appoint only two Governors in a four-year presidential term and four —a majority of the Governors—during eight years in office. In reality, however, many Governors leave before completing their 14-year terms, and recent Presidents have made more than one appointment to the Board every two years.

As stipulated in the Banking Act of 1935, one of the seven Governors is appointed by the U.S. President to a four-year term as Chairman. This selection must be confirmed by the Senate. The Chairman serves as public spokesperson and representative for the Board, manager of the Board’s staff, and Chairman at Board meetings. Ben S. Bernanke was sworn in on February 1, 2006, as Chairman and a member of the Board of Governors of the Federal Reserve System. He also chairs the Federal Open Market Committee, the System’s principal monetary policymaking body. Chairman Ben Bernanke replaced Alan Greenspan, whose tenure spanned from August 11, 1987, to January 31, 2006.

The Board did not always enjoy the political independence that it has today. The first Federal Reserve Board, created by Congress in 1914, consisted of five members. The Secretary of the Treasury and the Comptroller of the Currency had automatic memberships, and the President was responsible for appointing the remaining three members, subject to the approval of the Senate. Two of the five members were designated Governor and Vice Governor, the chief administrative officers of the Board.

The role of Chairman at Board meetings was assigned to the Secretary of the Treasury.

One of the Board’s earliest conflicts concerned the strong representation of the Treasury Department on the Board. Some Board members were concerned that the presence of Secretary of the Treasury William McAdoo and Comptroller of the Currency John S. Williams, the two ex-officio officers on the Federal Reserve Board, created an inadvisable link to the Administration. In addition, several Board members complained that Board meetings were held at the Treasury Department headquarters in Washington.

They were concerned that this close relationship to the Treasury might create a conflict of interest and lead to undue political influence in the setting of monetary policy. These Board members suggested that the Federal Reserve Board meet outside Washington in order to discourage the Secretary of the Treasury and Comptroller from attending. Their proposal was never put into practice, however, because Congress passed the Banking Act of 1935, which eliminated the requirement for the Secretary of the Treasury and the Comptroller to serve on the Board. The Act also renamed the Federal Reserve Board as the Board of Governors, the title of Governor as Chairman, and the title of Vice Governor as Vice Chairman, and increased the number of Board members to its current level of seven. In 1937, the Board of Governors moved out of the Treasury building and into its own headquarters in Washington.

Reaffirming the apolitical nature of the Board, recent Presidents of both major political parties have selected the same Board Chairmen. Alan Greenspan was initially appointed Chairman by Ronald Reagan, a Republican, and later was reappointed by Republican George H. W. Bush, Democrat Bill Clinton, and Republican George W. Bush. Alan Greenspan’s predecessor, Paul Volcker, was first appointed by Jimmy Carter, a Democrat, and then reappointed by Ronald Reagan.

April 2007

This article has been reprinted with the authorization of the Federal Reserve