Waller, Modernizing Federal Reserve Operations in the 21st Century

Home News & Events Speeches Speech PDF <div class="js-disabled text-center"> <span class='icon icon-alert icon--jsAlert'></span> <span><strong>Please enable JavaScript if it is disabled in your browser or access the information through the links provided below.</strong> </span> </div> April 21, 2026 Modernizing Federal Reserve Operations in the 21st Century Governor Christopher J. Waller At The Brookings Institution, Washington, D.C. Share Watch Live Thank you, David and thank you to Brookings for having me speak today.1 Whenever anyone hears the words "Federal Reserve" they immediately think about monetary policy and the Federal Open Market Committee (FOMC) setting the federal funds rate. There is obviously tremendous media attention on those policy decisions, as there should be because they affect U.S. households and businesses and financial markets around the world. But the FOMC only meets 16 days a year to set monetary policy, so what are we doing at the Fed the rest of the time? The answer to that question is that we run a large and complex organization across 12 Federal Reserve Districts, with a heavy operations focus. So today I want to talk about how we meet these operational responsibilities to give you a better understanding of the structure of the Fed and what we do each day. As I will explain, there were and remain good reasons for the Fed's decentralized structure, which is mandated under the 1913 Federal Reserve Act. It is an important enabler in carrying out our many vital responsibilities, which affect virtually everyone in every corner of America. But that doesn't mean the Fed's operations should not change to reflect a changing world. As the Board member responsible for leading the oversight of Federal Reserve operations on behalf of my colleagues, I believe the Federal Reserve needs to be continuously oriented toward modernizing how it operates—reducing costs, more effectively managing risk, and delivering the best possible value to the American taxpayer. And that has been my objective since I became the member of the Board of Governors responsible for Reserve Bank oversight. To explain why that matters and what it has meant in practice, I will start with a brief overview of the structure of the Fed and describe how its operations have evolved over time, including over the last few years under my direction. I will then address two questions that I believe are critical for thinking about how the Federal Reserve should organize its work in the 21st century. First, which Fed activities are intrinsically local, and conducted for the benefit of an individual Federal Reserve District? Second, which activities are conducted on behalf of the Federal Reserve System as a whole, with attendant opportunities to exploit specialization, economies of scope, and economies of scale? In short, what needs to be done at a Reserve Bank and what can be done more efficiently elsewhere in the System? A Short History of Operations in the FRS To begin with a quick orientation, the Federal Reserve System is composed of the Board of Governors in Washington, D.C., the 12 regional Reserve Banks located across the country and the Federal Open Market Committee. In this speech, I will focus solely on the Reserve Banks and not the Board or the FOMC. All told, there are approximately 20,000 employees across the 12 Banks, with the vast majority focused on operations—implementing market operations, performing fiscal agent activities for the U.S. Treasury, and running the Fed's payment systems, along with all the support and overhead functions like information technology (IT), human resources (HR), finance, and procurement that go along with operating 12 Reserve Banks. The Federal Reserve was created as a compromise between those who recognized the need for a U.S. central bank and those who were suspicious of concentrating such power in Washington or New York. The result was a decentralized system of 12 regional Reserve Banks with boards of directors drawn from the local business community. Although ultimate oversight in many respects resides with federally appointed officials in Washington, from the beginning each Reserve Bank was a self-contained organization. Each provided services, including check processing, wire transactions, and cash distribution, to the commercial banks in the District that had elected to be members. With membership in the Federal Reserve System, a bank received certain benefits and incurred certain obligations, notably to submit to regular examinations by the Reserve Bank in their District. Due to branching restrictions at the time, a member bank was in that District and that District only. In addition to these services and oversight, each Reserve Bank also collected local economic information and data and did analysis of the local economy. Initially, the discount rate at each Bank was set locally to reflect local economic and credit conditions. At the beginning, everything a Reserve Bank did was "local"—no national functions were performed. This decentralized approach made more sense when the economy and the banking system were much more regional in nature, but as finance and the economy became more national in scope, changes were needed. Statutory changes were made by Congress to the Federal Reserve Act in 1935 under which the presidents of the Reserve Banks took on a national role in setting monetary policy via the FOMC. The discount rate was also "nationalized" so that all Banks charged the same rate for lending to local banks. But after these changes, most Reserve Bank operations remained local. While monetary policy was conducted at the national level, bank supervision, payment system activities, and most other functions at Reserve Banks remained focused on serving its District. Also characteristic of the early years were Reserve Banks that had large numbers of workers engaged in what were at that time highly manual and labor-intensive processes. Such work included processing paper checks, managing distribution of coins and currency, "discounting" or providing commercial banks liquidity against a variety of instruments—often taking physical custody of this collateral to assure a security interest—and managing U.S. Treasury securities. In this era, Reserve Banks operated under a clear "Bank first, System second" mindset. In rare instances that required more of a "System" approach—for example, managing transactions between banks in different Federal Reserve Districts—this coordination occurred through occasional meetings of the Conference of Presidents, an ad hoc group composed of the 12 Reserve Bank presidents. A deeply embedded and long-standing common understanding of the decisionmaking process for the Conference of Presidents was that the group could not force a Bank to do anything—everything had to be resolved by consensus. This decisionmaking process was consistent with the view that the Reserve Banks were essentially independent, private-sector, and governed by the local boards of directors rooted in the District and thus had the freedom to operate as they saw fit within the broad confines of the Federal Reserve Act. Drivers of Transformation Over the decades, as technology changed and U.S. financial sector regulation evolved, the external environment began to shift in important ways. As financial transactions became increasingly digital in the 1960s, the Fed developed new, nationwide electronic payment capabilities. Congress ended bank branching restrictions in the 1980s. Regulatory changes allowed national banking organizations to emerge, a phenomenon which broke the one-to-one connection between a Reserve Bank and its member commercial banks. Commercial banks with operations across multiple Districts were not enthralled with needing to maintain relationships with multiple Reserve Banks, each of which offered slightly different mixes of services and slightly different pricing. In 1981, Congress directed the Fed to recover the costs associated with its payment services through fees levied on both member and nonmember banks, a requirement intended to level the playing field between the Reserve Banks and private-sector providers of payment services. By the mid-1990s, the Reserve Banks had begun consolidating their payment services in response to those developments. Some key services were starting to be centralized in specific Districts with the establishment of "product offices" to provide uniform services to banks nationally. Over this same period, check volumes began to drop precipitously as digital payments gained steam and the private sector took market share from the Fed in check processing. The terrorist attacks on September 11, 2001, underscored the vulnerability of a payment system that still relied on leased airplanes to fly paper checks around the nation. The digitization of paper checks followed the Check 21 Act in the early 2000s and led to a further reduction in the processing of physical checks. The result was that the Reserve Banks saw a significant reduction in operations and employment at their Branches, to the point of closing and selling some buildings. Even at head offices, the automation of check processing and other labor-intensive payments work reduced manpower needs and employment. The era when most head offices and many Branches ran three shifts of check processing each business day ended. On another front, as information technology advanced rapidly in the 1980s and 1990s, the Reserve Banks realized there were economies of scale to be achieved by centralizing information technology infrastructure into one location that would operate on behalf of the entire system. It made no sense for each Reserve Bank to construct, operate, and maintain its own mainframe or, later, server farm. Thus, in the early '90s the Reserve Banks created Federal Reserve Automation Services (FRAS, now referred to as National IT), to build and maintain a single common IT infrastructure. A FRAS di