What Is the Federal Reserve?

The Federal Reserve System was created by the Federal Reserve Act of 1913 as the central bank of the United States. It consists of the Board of Governors (a federal agency in Washington, D.C.) and 12 regional Federal Reserve Banks located in major cities across the country, plus their branches.

The Board of Governors is led by a Chair, currently serving a four-year renewable term, and six additional governors, all appointed by the President and confirmed by the Senate. The Fed operates with a degree of independence from Congress and the executive branch, although it remains accountable to Congress through regular testimony and reporting requirements.

The Federal Reserve has three main functions: conducting monetary policy to promote maximum employment and stable prices, supervising and regulating banks and other financial institutions to ensure the safety and soundness of the financial system, and maintaining the stability of the financial system and containing systemic risk.

Banking Supervision Role

As a banking regulator, the Federal Reserve's primary supervisory responsibilities cover:

  • Bank holding companies (BHCs) and financial holding companies (FHCs): Any company that controls one or more banks organized as a BHC must register with the Federal Reserve and is subject to Fed supervision on a consolidated basis. This includes some of the largest US financial conglomerates.
  • State-member banks: State-chartered banks that choose to join the Federal Reserve System are supervised by the Fed as their primary federal regulator, alongside their state banking regulator.
  • Systemically important financial institutions (SIFIs): Under Dodd-Frank, the Financial Stability Oversight Council (FSOC) can designate certain non-bank financial companies as systemically important, subjecting them to enhanced Federal Reserve supervision.
  • Foreign banking organizations (FBOs): Large foreign banks operating in the US through holding company structures are subject to Federal Reserve supervision at the US intermediate holding company level.
  • Savings and loan holding companies: Companies controlling federal or state-chartered thrift institutions are generally supervised by the Federal Reserve.

The Fed conducts on-site examinations and ongoing monitoring of these entities, assessing capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk (the "CAMELS" framework).

Regulation T and Margin Rules

One of the Federal Reserve's regulations with the most direct impact on individual investors is Regulation T (12 CFR Part 220). Regulation T sets the initial margin requirement for purchasing securities on credit through a broker.

Under the current Regulation T standard, an investor must deposit at least 50 percent of the purchase price of a marginable security before or promptly after the trade. The remaining 50 percent can be borrowed from the broker in a margin account. For example, to purchase $10,000 worth of marginable stock on margin, the investor must provide at least $5,000 in equity.

Key points about Regulation T:

  • The 50 percent initial requirement is a federal minimum. Brokers and FINRA can impose higher initial margin requirements.
  • Regulation T applies at the time of purchase. Post-purchase "maintenance margin" rules (minimum 25 percent equity under FINRA Rule 4210) are set by FINRA, not directly by the Fed.
  • Not all securities are marginable. Stocks trading below $5 per share, certain OTC securities, and securities in IPO periods may not be eligible for margin purchases under Regulation T.
  • Regulation T also covers short sales, options, and other credit extensions in the securities context.

The Federal Reserve also issues Regulation U (credit extended by banks for purchasing securities) and Regulation X (borrowers subject to Regulations T and U), which together form the framework for securities credit regulation.

Monetary Policy and Investors

The Federal Reserve's monetary policy decisions, made by the Federal Open Market Committee (FOMC), have broad effects on investment markets even though the Fed is not a securities regulator. The FOMC meets approximately eight times per year to set the target range for the federal funds rate, the overnight lending rate between banks.

When the Fed raises rates, the effects ripple through investment markets:

  • Bonds: Existing bond prices fall as new bonds offer higher yields, reducing the market value of existing fixed-rate holdings.
  • Equities: Higher discount rates reduce the present value of future earnings, often applying downward pressure to price-to-earnings multiples, particularly for growth stocks with earnings weighted toward the future.
  • Cash and money market instruments: Higher rates increase yields on savings accounts, money market funds, and Treasury bills, making cash and near-cash holdings more attractive relative to riskier assets.
  • Borrowing costs: Mortgage rates, consumer loan rates, and margin lending rates all tend to rise alongside the federal funds rate, affecting leveraged investors directly.

The Fed also conducts large-scale asset purchase programs (quantitative easing, or QE) and balance sheet reduction (quantitative tightening, or QT) that affect the supply of reserves in the banking system and can influence longer-term interest rates and risk asset valuations.

Consumer Complaints

Consumers with complaints about state-member banks (state-chartered banks that are Federal Reserve members) can submit complaints to the Federal Reserve's Consumer Help Center. The Fed reviews complaints involving issues such as improper account fees, lending discrimination, truth-in-lending disclosure failures, and electronic fund transfer disputes.

To determine whether your bank is a state-member bank regulated by the Fed, look for "Member FDIC" and the absence of "N.A." in the bank's name, or check the FDIC's BankFind database. You can also ask your bank directly which federal agency is its primary regulator.

For complaints that fall outside the Fed's jurisdiction, the Federal Reserve's Consumer Help Center will refer you to the appropriate regulator: the OCC for national banks, the FDIC for non-member state banks, the CFPB for consumer financial protection issues, or your state banking regulator.

Frequently Asked Questions

What does the Federal Reserve regulate?

The Federal Reserve regulates and supervises bank holding companies, financial holding companies, state-chartered banks that are members of the Federal Reserve System (state-member banks), savings and loan holding companies, and certain designated systemically important financial institutions (SIFIs). It also oversees US operations of foreign bank holding companies. The Fed is not the primary regulator of national banks (OCC), non-member state banks (FDIC), or credit unions (NCUA).

What is Regulation T and how does it affect margin trading?

Regulation T, issued by the Federal Reserve, sets the initial margin requirement for purchasing securities on credit. Currently, Regulation T requires investors to deposit at least 50 percent of the purchase price of a marginable security when buying on margin. The remaining 50 percent can be borrowed from the broker. FINRA's maintenance margin rules (minimum 25 percent equity) apply after purchase. Individual brokers may impose stricter requirements than Regulation T's minimum.

How does the Federal Reserve's monetary policy affect investors?

The Federal Reserve sets the federal funds rate target through its Federal Open Market Committee (FOMC), which influences short-term interest rates across the economy. Rising rates generally increase borrowing costs, reduce bond prices, and can compress equity valuations by raising the discount rate applied to future earnings. Falling rates tend to have the opposite effect. The Fed's balance sheet actions (quantitative easing or tightening) also affect market liquidity and longer-term interest rates.

Where do I file a bank complaint if my bank is state-chartered and Fed-regulated?

Complaints about state-chartered banks that are members of the Federal Reserve System can be submitted through the Federal Reserve's Consumer Help Center at federalreserveconsumerhelp.gov or by calling 1-888-851-1920. The Fed will route the complaint to the appropriate Federal Reserve Bank for review. If your bank is state-chartered but not a Fed member, the FDIC or your state banking regulator handles complaints.

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