The Federal Reserve Board of Governors runs the country’s central bank. It sets monetary policy, writes and enforces rules for banks and bank holding companies, watches for threats to financial stability, oversees the payment systems that move money between institutions, and supervises the twelve regional Federal Reserve Banks. Most of those jobs come from the Federal Reserve Act and later statutes like the Bank Holding Company Act and Dodd-Frank, and the Board carries them out with an unusual degree of independence: it funds itself through assessments on the Reserve Banks rather than through Congressional appropriations.
Setting Monetary Policy
The Board’s most visible job is shaping the cost and availability of credit. Congress gave the Federal Reserve a dual mandate of maximum employment and stable prices, and the main vehicle for pursuing both is the Federal Open Market Committee, which meets eight times a year to set a target range for the federal funds rate.1Federal Reserve Board. Federal Open Market Committee That rate flows through the rest of the economy, influencing mortgages, car loans, and credit card rates.
All seven governors hold permanent seats on the twelve-member FOMC, alongside the president of the Federal Reserve Bank of New York. The remaining four votes rotate among the other regional bank presidents. Because governors are always a majority of the voting bloc, the Board has decisive weight in every rate decision.
How Rate Decisions Actually Move Rates
The Board’s main operational tool for keeping the federal funds rate inside the FOMC’s target range is the interest rate it pays on reserve balances, known as the IORB rate. Banks that leave money at a Federal Reserve Bank earn that rate, which gives them little reason to lend to other banks for less. The Board sets the IORB rate directly, and changes take effect right after each FOMC meeting.2Federal Reserve Board. Interest on Reserve Balances
Reserve requirements, once a headline tool, no longer do much. The Board still has statutory authority to require depository institutions to hold a percentage of deposits in reserve, but it cut all reserve requirement ratios to zero in March 2020 and has not raised them since.3Federal Reserve Board. Reserve Requirements The IORB rate has effectively taken over as the workhorse.
The Board also reviews the discount rate, the rate charged when banks borrow directly from the Federal Reserve. Each regional Reserve Bank’s board of directors proposes a discount rate, and the Board of Governors reviews and approves it.4Federal Reserve Board. Discount Window Lending In normal times the discount rate sits above the federal funds target, making it a backstop rather than a first stop.
Regulating Banks and Bank Holding Companies
The Board is also a banking regulator. Under the Bank Holding Company Act of 1956, it oversees any company that controls one or more banks and has authority to approve or deny mergers, acquisitions, and new holding company formations. It writes capital and risk-management rules for these companies and can block transactions it views as anticompetitive or financially unsound.5Office of the Law Revision Counsel. 12 USC Chapter 17 – Bank Holding Companies
State-chartered banks that voluntarily join the Federal Reserve System also fall under the Board’s supervision. Examiners conduct regular inspections to verify these banks hold adequate capital, manage risk responsibly, and comply with federal banking laws. The Board coordinates this work with state regulators.
Tougher Rules for the Largest Firms
The Dodd-Frank Act directed the Board to impose enhanced prudential standards on the largest and most interconnected financial companies.6Federal Deposit Insurance Corporation. Selected Sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act Those standards include stress tests that model how a firm would fare in a severe recession, stricter capital and liquidity buffers, and resolution plans (sometimes called living wills) laying out how the firm could be wound down in an orderly way if it failed. Congress later raised the asset threshold that triggers automatic application of the strictest requirements, so the rules scale with a firm’s size and complexity.
The Board also represents the United States in the Basel Committee on Banking Supervision, working with foreign regulators on international capital and liquidity standards for globally active banks.7Federal Reserve Board. 2024 Annual Report – Supervision and Regulation
Watching Over the Financial System
Beyond examining individual banks, the Board tracks threats to the financial system as a whole. A dedicated Division of Financial Stability identifies and analyzes emerging risks across markets, institutions, and funding structures, then recommends responses to the Board.8Federal Reserve Board. Financial Stability The Board publishes a semiannual Financial Stability Report covering vulnerabilities such as asset price bubbles, excessive leverage, and short-term funding mismatches. This system-wide surveillance sits apart from bank-by-bank examinations and reflects a lesson from 2008: individual banks can look healthy while the system as a whole is fragile.
Enforcing Banking Laws
When institutions break the rules or operate recklessly, the Board has real enforcement tools. The Federal Reserve Act sets a three-tier civil penalty structure:
- First tier: straightforward violations of certain banking restrictions carry a penalty of up to $5,000 per day the violation continues.
- Second tier: violations that are part of a pattern of misconduct, cause more than minimal loss to the bank, or produce personal gain carry a penalty of up to $25,000 per day.
- Third tier: knowing violations that cause substantial losses or substantial personal gain can reach up to $1,000,000 per day for individuals, and the lesser of $1,000,000 per day or one percent of the bank’s total assets for the institution itself.
These statutory amounts are periodically adjusted for inflation.9Federal Reserve Board. Section 29 – Civil Money Penalty The Board can also issue cease-and-desist orders to halt unsafe practices and remove officers or directors responsible for serious misconduct.
Consumer Protection and Community Reinvestment
Before 2011, the Board wrote most consumer protection rules for banking, including regulations under the Truth in Lending Act and the Electronic Fund Transfer Act. The Dodd-Frank Act transferred that rulemaking authority to the newly created Consumer Financial Protection Bureau. The Board still examines state member banks for compliance with consumer protection laws and takes enforcement action when they fall short.
One consumer-facing area still squarely with the Board is the Community Reinvestment Act. The CRA requires banks to help meet the credit needs of the communities they serve, including lower-income neighborhoods. The Board evaluates state member banks’ CRA performance and factors those ratings into decisions on mergers, acquisitions, and new branches.10Federal Reserve Board. Community Reinvestment Act (CRA) A poor CRA record can stall expansion plans.
The Board also caps how much large card-issuing banks can charge merchants for processing debit card transactions. Under Regulation II, the maximum interchange fee an issuer with $10 billion or more in assets may charge is 21 cents per transaction plus 5 basis points of the transaction value.11eCFR. 12 CFR Part 235 – Debit Card Interchange Fees and Routing (Regulation II) Smaller issuers are exempt. The Board has proposed lowering these limits but has not finalized changes as of early 2026.
Lending in Emergencies
The Board’s authority expands during a financial crisis. In normal times it oversees the discount window, through which depository institutions borrow short-term funds against collateral. The window has three tiers:
- Primary credit is available to institutions in generally sound financial condition, at a rate above the federal funds target.
- Secondary credit is available to institutions that don’t qualify for primary credit, typically at a higher rate, to support an orderly return to market funding or a wind-down.
- Seasonal credit is designed for small depository institutions, generally under $500 million in deposits, that face predictable swings tied to agriculture or tourism.
All discount window loans must be collateralized to the satisfaction of the lending Reserve Bank.4Federal Reserve Board. Discount Window Lending
When conditions turn severe, Section 13(3) of the Federal Reserve Act lets the Board extend emergency credit to a much broader set of borrowers under “unusual and exigent circumstances.” At least five of the seven governors must vote to authorize such lending. Dodd-Frank added guardrails: the Board must get prior approval from the Secretary of the Treasury, and the lending must be structured as a broadly available program rather than aid for a single firm. Borrowers still must post acceptable collateral and show they cannot get credit elsewhere.
The Board, working through the FOMC, also maintains standing liquidity swap lines with five foreign central banks: the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank. In a swap, the foreign central bank exchanges its currency for dollars, lends those dollars to institutions in its jurisdiction, then buys its currency back at the same exchange rate on a set future date, paying the Fed a market-based interest rate. The foreign central bank bears the credit risk on those downstream loans.12Federal Reserve Board. Central Bank Liquidity Swaps These arrangements, converted from temporary to standing lines in 2013, can be activated quickly during market stress.
Running the Federal Reserve System
The Board’s operational reach across the System is broader than most people realize. Section 11 of the Federal Reserve Act gives it general supervision over all twelve regional Federal Reserve Banks, including the power to examine their accounts and to suspend or remove officers and directors for cause.13Office of the Law Revision Counsel. 12 USC 248 – Enumerated Powers The Board reviews and approves each regional bank’s annual operating budget and major capital spending.
Each regional bank has a nine-member board of directors divided into three classes. The Board of Governors appoints the three Class C directors, one of whom serves as chair of the regional bank’s board.14Office of the Law Revision Counsel. 12 USC 305 – Class C Directors, Selection, Federal Reserve Agent The Board also must approve each regional bank’s president and first vice president, giving it a direct say in who runs every branch of the System.
Payment Systems and FedNow
The Board oversees the plumbing that moves money between financial institutions: check clearing, wire transfers, and the automated clearinghouse network. It sets uniform standards and fees for these services, balancing efficiency against the requirement to recover costs over time.
The newest piece of that infrastructure is the FedNow Service, an instant payment system that lets participating banks send and receive funds around the clock. The Board approved the 2026 fee schedule for FedNow, projecting $230.3 million in operating expenses for the service. To encourage adoption, it has kept discounts in place through 2026 that reduce participation fees to zero and waive charges on the first 2,500 transactions per month. The Board expects to revisit pricing after 2026 and has acknowledged that FedNow will take longer than the typical ten-year window to achieve full cost recovery.15Federal Register. Federal Reserve Bank Services