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How the Fed is run, and what it does

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Ben Bernanke has been nominated to hold what is arguably the world's most influential seat of financial power. Yet the job of Federal Reserve chairman is also little understood. Here is a primer on the nation's central bank:

Why does the Federal Reserve exist?

In the early 1900s, the United States was a fast-growing industrial power with a history of periodic banking crises - and a populist wariness of creating a powerful central bank. The Federal Reserve Act of 1913 created a partially decentralized system that evolved, by the 1940s, mechanisms to maintain price stability and prevent financial panics that could cause bank failures and depression. Some of the Fed's jobs are mundane - such as processing millions of private checks and electronic payments as they flow through the US banking system. But its larger mission is to maintain confidence in the wider system of private banking.

Who runs the Fed?

A seven-member Board of Governors, led by a chairman and vice chairman, steers the Fed nationally. The Board members are appointed by the president and confirmed by the Senate, and they serve 14-year terms that are staggered to maintain a degree of continuity. Twelve regional Federal Reserve Banks, meanwhile, operate under the Board's general oversight. Each regional bank is headed by a president chosen by that bank's board of directors, subject to approval by the Fed's national board.

What does the chairman do?

While he gets the same single vote as other officials at key meetings, the chairman takes the lead role in guiding Fed policy. He is also the most public face of the Fed to the outside world, testifying to Congress semiannually and often moving markets with words of calm or blunt warnings about economic conditions.

How does monetary policy work?


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