What it means
The Federal Reserve System has two main parts: the Board of Governors in Washington and twelve regional Federal Reserve Banks across the country. The Board is the central authority, while the regional banks carry out day-to-day operations such as supervising local banks and processing payments.
When people say FRB they usually mean the Board. The seven governors are nominated by the President and confirmed by the Senate.
They serve long, staggered terms so that no single president can quickly replace the whole Board, and the chair and vice chair are appointed to shorter renewable terms. This design is meant to give the Board a degree of independence from short-term politics.
The Board plays a key part in monetary policy. Its governors sit on the Federal Open Market Committee, which decides on the interest rate target and on buying and selling government securities, together with five regional bank presidents.
Those decisions influence mortgage rates, business loan rates, exchange rates and the overall pace of the economy. It also has supervisory duties.
The Board writes and enforces many of the rules for banks and bank holding companies, including capital requirements and stress tests, and it works with other agencies to oversee the payments system. Its reports and speeches are watched closely by markets.
For a manager outside finance, the FRB matters because its decisions change the cost of borrowing and the value of savings. A rise in the target rate typically makes loans more expensive, which affects budgets, investment plans and customer demand.
Reading the Board's statements helps businesses judge where interest rates may head. Not everything the Board does is dramatic.
It publishes regular data on industrial production, consumer credit and bank balance sheets, and these releases are widely used by economists and company planners as a guide to economic conditions.
In practice
Real-world examples.
Example
A retailer with a $2,000,000 variable-rate credit line reads that the Federal Reserve Board has raised its target rate by 0.50%. The finance director calculates that annual interest cost will increase by $10,000 if the line is fully drawn and tells the board. He also reviews the effect on the company's covenant tests.
Example
A community bank receives new capital rules from the Federal Reserve Board. Its compliance officer prepares a plan to meet them and reports to directors every quarter on progress. The officer also updates the risk register with the new requirements.
Example
An export company watches Board announcements closely, because changes in US interest rates tend to move the dollar. The treasurer decides to hedge the next six months of foreign currency receipts before an expected announcement. She records the decision in the treasury policy file.
Case study
Seen in the real world.
Harlow Home Builders is a fictional company that builds family homes. Its chief financial officer noticed that sales slowed every time the Federal Reserve Board raised its target rate. She asked her analyst to quantify the link.
The analyst found that each rise of 1.00% in mortgage rates reduced weekly viewings by roughly 8% in the company's data, in this illustrative case. The CFO used the finding to build a rate sensitivity table into the sales budget, with a best, expected and worst case for the coming year.
When rates did rise, the company had already slowed land purchases and negotiated flexible terms with contractors. The CFO later said the Board's announcements had become a standing item on the monthly management agenda. She also asked the sales team to share weekly viewing numbers with finance, so that any shift after an announcement could be spotted within days instead of at quarter end.
Watch out
Common mistakes.
- Believing the Federal Reserve Board directly sets the interest rate on every loan, when it influences rates through its policy target and market operations.
- Confusing the Board in Washington with the regional Federal Reserve Banks, which have different roles.
- Assuming the Board is part of the president's administration, when it is designed to operate independently.
Questions
People also ask.
How many members does the Board have?
It has seven governors, who serve staggered terms of fourteen years. The chair is one of the seven and acts as the public face of the institution.
Is the Board the same as the FOMC?
No. The FOMC is a separate committee that includes the governors and some regional bank presidents, and it makes the interest rate decisions. The FOMC meets several times a year, and its statements are among the most closely watched announcements in finance.
Does FRB always mean Federal Reserve Board?
Usually, but it can refer to a Federal Reserve Bank, so check the context of the sentence. Reading the full phrase on first use avoids confusion in reports and emails.
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