Who Really Owns the Federal Reserve?

Is It a Secret Conspiracy to Create a One World Bank?

all seeing eye
Many believe the all-seeing eye on the dollar proves the Fed is controlled by the Illuminati. Credit: Steven Puetzer/Getty Images

The Federal Reserve System, also known as the Fed, is the central bank for the United States. This position makes it the most powerful actor in the global economy. It is not a company or government agency and its leader is not an elected official. This makes it seem highly suspicious to many people because it's not beholden to voters or shareholders.

Who Owns the Federal Reserve?

The Federal Reserve is an independent entity established by the Federal Reserve Act of 1913.

Congress wanted the Fed to have 12 regional banks to represent America's diverse regions. President Wilson wanted a government-appointed central board. The compromise meant the Fed has both. (Source: "Federal Reserve Act Signed by President Wilson," Federal Reserve History.)

The president and Congress must approve all members of the Federal Reserve Board of Governors. But, their board members' terms deliberately don't coincide with those of elected officials. The President appoints the Federal Reserve Chair, currently Janet Yellen. Congress must approve the President's appointment. The Chair must report on the Fed's actions to Congress.

Congress can alter the statutes governing the Fed. For example, the Dodd-Frank Wall Street Reform Act limited the Fed's powers. It requires the Government Accountability Office to audit the emergency loans the Fed made during the 2008 financial crisis. It also required the Fed to make public the names of banks that received any emergency loans or TARP funds.

It also required the Fed to get Treasury Department approval before making emergency loans, like it did with Bear Stearns and AIG.

Other than that, the Fed's decisions don't have to be approved by the President, legislators or any elected official. Furthermore, the Fed does not receive its funding from Congress.

 

The 12 regional Federal Reserve Banks are set up similarly to private banks. They store currency, process checks and make loans to the private banks within their area that they regulate. These banks are also members of the Federal Reserve banking system, and so must maintain reserve requirements. In return, they can borrow from each other at the discount rate when needed. 

To be a member of the Federal Reserve System, commercial banks must own shares of stock in the 12 regional Federal Reserve banks by law. But owning Reserve Bank stock is nothing like owning stock in a private company. These stocks can't be traded, and they don't give the member banks voting rights. They pay out dividends, but it's mandated by law to be six percent. (Source: "Who Owns the Federal Reserve?" Federal Reserve.)

How Does the Fed Work?

The Fed's primary function is to set monetary policy to control inflation. Ongoing inflation is like an insidious cancer that destroys any benefits of growth. For this reason, in recent years the Fed's primary responsibility has been to manage inflation. Its most important tool is the fed funds rate. During the financial crisis, it deployed innovative tools to stabilize the global banking system.

Since the recession, it also pledged to reduce unemployment and spur economic growth.

The Fed works by using its monetary policy tools. Setting low interest rates is called expansionary monetary policy, and makes the economy grow faster. If the economy grows too fast, it triggers inflation. Raising interest rates is called contractionary monetary policy. It slows economic growth by making loans and other forms of credit more expensive. This restricts the money supply. As demand falls, businesses lower prices. This creates deflation. That further lowers demand because consumers delay buying while waiting for prices to fall further.

How does the Fed cut interest rates? It lowers the target for the fed funds rate. Banks usually follow the Fed's lead, cutting LIBOR and the prime interest rate. The Fed can also use its other tools, such as lowering the discount rate banks use to borrow funds directly from the Fed's discount window.

To combat the financial crisis, the Fed got creative. It bought mortgage-backed securities from banks directly as a way to pump liquidity into the financial system. It also started buying Treasurys. Both purchases became known as quantitative easing.

Critics worried that the Fed's policies would create hyperinflation. They argued that the Fed was just printing money. But banks weren't lending, so the money supply wasn't growing fast enough to cause inflation. Instead, they hoarded cash to write down a steady stream of housing foreclosures. The situation didn't improve until 2011. By then, the Fed had cut back on quantitative easing.