Question

How is the chairperson of the Federal Reserve System selected? Describe the relationship between the Board of Governors of the Federal Reserve System and the 12 Federal Reserve Banks. What is the purpose of the Federal Open Market Committee (FOMC)? What is its makeup?

Short answer

The president selects the chairperson of the Federal Reserve System.

The Board of Governors takes decisions and guides the 12 Federal Reserve Banks to implement the decisions.

The purpose of the FOMC is to help the Board of Governors implement the monetary policy.

The 12 Federal Reserve Banks, along with the Board of Governors, form the FOMC.

Step-by-step solution

Step 1. Selection of chairperson of Federal Reserve System

The central authority of the U.S money and banking system is the Board of the Governors of the Federal Banking System. The U.S president appoints the chairperson, vice-chairperson, and other board members for the term of 14 years.

Step 2. Relationship between Board of Governors and 12 Federal Reserve banks

The Board of Governors takes decisions regarding the monetary policy, and the FOMC helps the Board implement the monetary policy. Therefore, the Board of Governors and Federal Reserves share a hierarchical relationship where the Board of governors ranks over the FOMC.

Step 3. Purpose of FOMC and its members

The FOMC comprises the Board of Members and 12 Federal Reserve Banks, who collectively make decisions and implement the monetary policy. The Board of Governors takes the decisions, and the 12 Federal Reserves work under the board to implement the decision.

The Federal Open Market Committee is made up of 12 individuals, including:

• The seven members of the Board of Governors.

• The president of the New York Federal Reserve Bank.

• Four presidents were selected from the remaining Federal Reserve Banks, each serving on a one-year rotating basis.