What is the Fed? A Simple Explanation of its Structure and 3 Key Bodies (Compared with the Bank of Japan)
One essential factor in grasping global economic trends is the monetary policy of the FRB (Federal Reserve Board).
If you intend to invest seriously in any form, you will hear the word "FRB" or "The Fed" frequently. That is how deeply the trends of the Fed and the ups and downs of the global economy are connected.
In this article, I will explain the overview and mechanism of the FRB, as well as its three constituent bodies, in an easy-to-understand manner by comparing them with the Bank of Japan (BOJ).
What is the FRB (Federal Reserve Board)?
FRB stands for Federal Reserve Board. It is one of the elements that make up the Fed (The Federal Reserve System), which is the central bank of the United States.
It plays a role similar to the Bank of Japan in Japan. It is the institution that holds the key to the U.S. economy, formulating and implementing monetary policies to revitalize the U.S. economy.
The trends of the Fed affect not only the U.S. but also the economies of countries around the world, including Japan.
For example, if the Fed raises interest rates, the value of the U.S. dollar tends to rise, often leading to a weaker Yen and a stronger Dollar.
Therefore, understanding the Fed's movements is essential for deciphering Japan's domestic economic situation as well.
The Fed's moves attract attention worldwide because the U.S. economy is central to the global economy, and it is the Fed that moves it significantly.
The monetary policies implemented by the Fed, and especially the FOMC (Federal Open Market Committee)—the meeting where U.S. monetary policy is decided—carry enough power that the discussed content and the Fed Chair's remarks can move the global economy.
The 3 Major Bodies Constituting the Fed
In Japan's case, a single institution called the Bank of Japan conducts central banking operations. However, the United States is characterized by a system mainly composed of three institutions.
I will explain each of them:
• The FRB (Federal Reserve Board / Board of Governors)
• Federal Reserve Banks (Regional Banks)
• The FOMC (Federal Open Market Committee)
1. The FRB (Federal Reserve Board)
The FRB is organized by 7 governors, including 1 Chair and 1 Vice Chair.
Based in Washington, D.C., the FRB acts as the governing body of the Federal Reserve System. It formulates and implements monetary policy, while specific operations are carried out by regional Federal Reserve Banks (described later).
In Japan, the Bank of Japan handles everything from policy decisions to implementation. However, the United States is a federal system where state authority is strong, and there is a historical distrust of centralized power. Therefore, the central banking system is designed to consider local regions.
Also, the FRB is designed as an agency independent of the U.S. federal government and maintains a certain degree of independence in policy-making. This is to prevent the Fed's monetary policy decisions from being subject to political pressure or influence.
However, since the FRB governors are appointed by the President and must be approved by the Senate, they are not completely independent.
2. Federal Reserve Banks (Regional Banks)
The Federal Reserve Banks are regional banks that constitute part of the Federal Reserve System (FRS). The structure where the FRB supervises the regional banks, and monetary policy decisions are made at the FOMC (described later), is a characteristic multilayered structure of the U.S. central banking system.
There are 12 Federal Reserve Banks in the United States. These divide the 50 states into 12 districts. They implement monetary policy in cooperation with the FRB Board while considering the economic conditions of each region.
These regional banks handle central banking operations such as issuing banknotes and coins, operating payment systems, and holding reserve deposits of member banks in their districts.
Examples include the Federal Reserve Bank of Boston, the Federal Reserve Bank of New York, and the Federal Reserve Bank of Chicago. They conduct lending to financial institutions and purchase bonds in their respective districts.
3. The FOMC (Federal Open Market Committee)
The FOMC (Federal Open Market Committee) is a critical meeting that decides U.S. monetary policy.
At the FOMC, adjustments to the policy interest rate and financial market trends are discussed, and decisions are made to stabilize the U.S. economy.
The FOMC consists of the members of the FRB Board of Governors and the presidents of the regional Federal Reserve Banks. They meet regularly to determine the direction of policy.
Usually, they meet 8 times a year to make policy decisions while analyzing economic indicators and market trends. Voting rights are held by the 7 FRB governors and 5 of the 12 regional Federal Reserve Bank presidents.
Regarding the breakdown of the 5 regional presidents: the President of the Federal Reserve Bank of New York has a permanent voting right, while the remaining 4 are selected from other regional bank presidents on a rotating basis.
The FOMC is equivalent to the "Monetary Policy Meeting" of the Bank of Japan.
The BOJ's Monetary Policy Meeting is also a venue for deciding policy interest rates and monetary policy guidelines while analyzing economic indicators and market trends.
Purpose of Financial Policy by the FRB
The main purposes of the Fed's monetary policy are the following two:
1. Maximum Employment: Aiming to keep the unemployment rate low so that as many people as possible can have jobs.
2. Price Stability: Preventing inflation or deflation to stabilize prices.
To achieve these goals, the Fed implements monetary policies such as raising or lowering interest rates.
Many central banks in developed countries, such as the Bank of Japan, have a "Single Mandate" (one mission) targeting only "Price Stability." However, the Fed is characterized by having a "Dual Mandate" (two missions) of both "Price Stability" and "Maximum Employment."
Summary
In this article, I focused on the FRB (Federal Reserve Board) and the Fed system.
Considering that trends in the U.S. economy significantly affect the global economy, it is essential to have an interest in the Fed when investing.
I personally always keep my antenna up regarding the Fed's movements, and I pay particular attention to interest rate movements.
This is because interest rate movements significantly affect the movements of bonds and stocks.
(Reference Article: Investment for Achieving FIRE - Bond Investment Edition)
I highly recommend that you conduct your investment activities while paying attention to the trends of the Fed in the future. (Text by Julius)
About the Author Kenji Kamioka
CEO, Julius Inc. / FIRE Practitioner
Kenji Kamioka is a former IT executive who spent 30 years in the corporate world, with over 10 years working across Asia. His life changed when he read Rich Dad Poor Dad.
Realizing the trap of the "rat race," he started building assets in real estate and stocks while still working. It took him 10 years, but he successfully achieved Financial Freedom and graduated from the salaryman life.
He established his own asset management company to optimize tax efficiency and now dedicates his time to teaching others how to escape the corporate cage.
His advice is not theoretical but based on the gritty reality of achieving FIRE.Credentials: AFP (Affiliated Financial Planner), Certified Real Estate Transaction Agent.
Book
❶『令和のサラリーマンの為のFIREのススメ』(Amazon電子書籍）
❷『FIRE Recommendation for Office Employee』(Amazon Kindle）
