Good question here in the Ask Cullen page. I get this one a lot so it’s worth some detailed explanation.
First, it helps to understand what the Fed really is. The Federal Reserve System was modelled after the New York Clearinghouse that existed in New York during the 1800’s and 1900’s. As its name states, the New York Clearinghouse was just a big clearinghouse where many of the big banks would come to settle their interbank payments. Unfortunately, it wasn’t broad enough to handle the scope and complexity of the US banking system so these regional clearinghouses were deficient in dealing with banking crises and liquidity issues. The Fed System took this private model and ramped it up into a public/private hybrid model to create a national clearinghouse for interbank payments. You don’t hear much talk about this on a daily basis, but that’s really what the Fed is – it’s just a big clearinghouse to help smooth the payments system. All the other stuff it gets attention for (like monetary policy) is just a sideshow to this primary purpose it’s serving – to maintain a healthy functioning payments system.
But the Fed is a weird entity when it comes to “ownership”. It exists due to an act of Congress. But it is also considered an independent entity because it is not part of the Executive or Legislative branches of government. The Fed exists because Congress created it, but it doesn’t enact policy measures with any Congressional or Presidential approval. Politically, this makes it a very independent entity.
The Regional Fed banks are arms of the Fed system that serve like regional versions of the NY Clearinghouse. One thing that muddies this discussion on “ownership” is the issuance of stock by the regional Fed banks to the member banks. This stock pays a fixed 6% dividend and gives the banks a claim on the Fed’s annual profits. But let’s keep this in the right perspective. Last year the Fed earned $90.5B. Of this, $1.6B was paid out in dividends. The remaining $88B was remitted back to the US Treasury. While the US Treasury doesn’t technically own shares in the Federal Reserve the Fed is required to remit its profits at the end of the year back to the Federal Government. As you can see, remittance often dwarfs any dividends paid back to the banks. In other words, the US Treasury is the recipient of most of the Fed’s profits.
Let’s also not forget the primary purpose of the Fed. Remember, the Fed exists to serve the payments system. This means it is a supporter of the US banking system. Before it can ever achieve its dual mandate on price stability and full employment the Fed must ensure the payments system is healthy. Therefore, the Fed is often viewed as a servant to the banking system while also trying to be a public purpose servant. It has, in effect, two masters by design.
The Federal Reserve system is an imperfect, but rather innovative clearinghouse. Its structure as “independent within government” makes it hard to decipher precisely who owns it. I prefer to think of the Fed as being an entity designed to help support the US payments system (which thereby makes it a bank facilitating entity) which serves public purpose and private purpose. In other words, it’s better to think of the Fed as a public/private hybrid and not really being “owned” by anyone.
Who Owns the Federal Reserve – Federal Reserve
Federal Reserve Annual Report – Federal Reserve
The Federal Reserve in the US Payments System – Federal Reserve
Did you have a comment or question about this post, finance, economics or your love life? Feel free to use the discussion forum here to continue the discussion.*
*We take no responsibility for bad relationship advice.