Thanks a bunch, David, and big shoutout to Brookings for letting me have the floor today. When folks hear "Federal Reserve," they instantly think of monetary policy and how the Federal Open Market Committee (FOMC) sets that federal funds rate. These policy moves are a big deal since they impact US households, businesses, and the global finance markets, which is why they get so much buzz in the media—totally fair. But the FOMC only meets 16 days a year to nail down those monetary policies, so what are we doing with the Fed for the rest of the time?
The answer to this question is that we manage a large and complex organization across the 12 Federal Reserve Districts and have a strong focus on operations. Therefore, today I want to discuss how we carry out these operational responsibilities to help you better understand the structure of the Fed and what we do every day. As I will explain, there were valid reasons for the decentralized structure of the Fed mandated by the 1913 Federal Reserve Act, and those reasons still exist. This structure is a significant facilitator in fulfilling many of our vital responsibilities that affect nearly everyone across America.
However, this does not mean that the Fed's activities should not change to adapt to the evolving world. As a Board member responsible for overseeing the Federal Reserve's operations on behalf of my colleagues, I believe that the Federal Reserve must continuously focus on modernizing its operations, reducing costs, managing risk more effectively, and providing the best value to the American taxpayer possible. And that has been my goal since I became a Board member responsible for Reserve Bank oversight. To explain why this is important and what it means in practice, I will start with a brief overview of the Fed's structure and how its operations have evolved over time, particularly in the last few years under my leadership. I will then address two questions that I believe are critical to consider regarding how the Federal Reserve should organize its work in the 21st century. First, which Fed activities are essentially local and conducted for the benefit of an individual Federal Reserve District? Second, which activities are carried out on behalf of the Federal Reserve System as a whole and offer opportunities to leverage specialization, economies of scope, and economies of scale? In short, what needs to be done at a Central Bank and what can be done more efficiently elsewhere within the System?
A Brief History of Operations at the Federal Reserve System
To start with a quick overview, the Federal Reserve System consists of the Board of Governors in Washington DC, 12 regional Reserve Banks located across the country, and the Federal Open Market Committee (FOMC). In this talk, I will focus solely on the Reserve Banks and will not address the Board or the FOMC. In total, there are approximately 20,000 employees across the 12 Banks, the vast majority of whom are focused on operations; they are tasked with implementing market operations, conducting financial intermediation activities for the U.S. Treasury, and operating the Fed's payment systems, along with managing all support and overhead functions that come with running the 12 Reserve Banks, such as information technology (IT), human resources (HR), finance, and procurement.
The Federal Reserve was established as a compromise between those who recognized the need for a central bank in the U.S. and those who were wary of concentrating that power in Washington or New York. The result was a decentralized system consisting of 12 regional Reserve Banks with boards of directors selected from the local business community. While ultimate oversight may rest with federally appointed officials in Washington, from the beginning, each Reserve Bank was a self-sufficient institution. Each provided services to commercial banks in the Region that chose to be members, including check processing, wire transfers, and cash distribution. By becoming a member of the Federal Reserve System, a bank gained certain advantages but also assumed the responsibility of regular oversight by its Reserve Bank. Due to then-existing branch restrictions, a member bank could only operate in that Region. In addition to these services and oversight, each Reserve Bank collected local economic information and data and conducted analyses of the local economy. Initially, the discount rate at each Bank was set locally to reflect local economic and credit conditions. In the beginning, everything a Central Bank did was "local" in nature; no functions were performed at the national level.
This decentralized approach made more sense when the economy and banking system were inherently much more regional, but as finance and the economy gained a more national dimension, changes became necessary. Congress made legal changes to the Federal Reserve Act in 1935, allowing Reserve Bank presidents to take on a national role in establishing monetary policy through the FOMC. The discount rate was also "nationalized," so all Banks applied the same rate for lending to local banks. However, after these changes, most of the operations of the Reserve Banks remained local. While monetary policy was conducted at the national level, bank supervision, payment system activities, and many other functions at the Reserve Banks continued to focus on serving their respective Regions.
Another feature of the early years was the large number of employees at the Reserve Banks who dealt with processes that were quite manual and labor-intensive at the time. These tasks included processing paper checks, managing the distribution of coins and paper currency, providing liquidity to commercial banks against various instruments (often requiring physical custody of this collateral), and managing U.S. Treasury securities.
During this period, Reserve Banks operated with a clear "Bank First, then System" understanding. In rare instances that required more of a "System" approach—such as managing transactions between banks in different Federal Reserve Districts—this coordination occurred through occasional meetings of the Conference of Presidents, a temporary group consisting of the 12 Reserve Bank presidents. The deeply entrenched and long-standing common understanding regarding the decision-making process of the Conference of Presidents was that the group could not compel any Bank to do anything—everything had to be resolved by consensus. This decision-making process was consistent with the view that Reserve Banks were essentially independent, private sector entities managed by locally rooted boards of directors, thus allowing them the freedom to operate as they saw fit within the broad confines of the Federal Reserve Act.
Factors of Transformation
Over the decades, as technology evolved and regulations in the U.S. financial sector developed, the external environment began to change in significant ways. In the 1960s, as financial transactions became increasingly digital, the Fed developed new, nationwide electronic payment capabilities. Congress lifted branch restrictions on banks in the 1980s. Regulatory changes allowed the emergence of national banking entities that severed the one-to-one connection between a Reserve Bank and member commercial banks. Commercial banks operating in multiple regions were dissatisfied with the need to maintain relationships with multiple Reserve Banks, each offering slightly different service mixes and slightly different pricing. In 1981, Congress mandated that the Fed cover the costs associated with payment services through fees charged to both member and non-member banks; this requirement aimed to create a level playing field between Reserve Banks and private sector payment service providers.
By the mid-1990s, Central Banks began to consolidate payment services in response to these developments. Some core services began to be centralized in specific regions through the establishment of "product offices" to provide uniform services to banks nationwide. At the same time, as digital payments gained momentum and the private sector captured market share in check processing from the Fed, check volumes began to decline rapidly. The terrorist attacks on September 11, 2001, highlighted the fragility of a payment system that still relied on chartered planes to transport paper checks nationwide. The digitization of paper checks followed the Check 21 Act in the early 2000s, further reducing the need for physical check processing. Consequently, Central Banks saw significant reductions in operations and employment at their branches, even closing and selling some buildings. Even at central offices, automation in check processing and other labor-intensive payment tasks reduced the need for human labor and employment. The era in which most central offices and many branches processed checks in three shifts every business day came to an end.
On the other hand, as information technology rapidly advanced in the 1980s and 1990s, the Reserve Banks realized that economies of scale could be achieved by centralizing the IT infrastructure to work for the entire system in one place. It did not make sense for each Reserve Bank to set up, operate, and maintain its mainframe or later server farm. Therefore, in the early 90s, the Reserve Banks established the Federal Reserve Automation Services (FRAS, now known as National IT) to create and maintain a single shared IT infrastructure. A FRAS director was appointed to manage this consolidated infrastructure, but most of the decision-making authority remained with individual Reserve Banks.
More recently, in 2021, the Fed consolidated its financial services into a single national payment services unit with its own chief payment executive (CPE) to oversee payment processing across the 12 Reserve Banks. With the appointment of a CPE and the enhanced authority of the chief information officer, the Fed transitioned to a world where its undeniably critical operational responsibilities are managed at the System level rather than at the individual Bank level.
Another example of the Fed's gradual move toward centralization is its role as the financial intermediary for the Treasury; this role includes managing payments and security issuances, auctions, and buybacks, along with providing other banking services. Much of this financial intermediation work was distributed among Reserve Banks. In 2014, the Treasury's Financial Services Office began consolidating its financial intermediation work mainly in St. Louis, Kansas City, and Cleveland, while the New York Federal Reserve Bank continued to manage U.S. Treasury auctions and other activities requiring direct market interaction.
Despite the gradually increasing centralization in payments, information technology, and financial management, many support functions, including human resources, procurement, and finance, are still carried out somewhat separately in each of the 12 Reserve Banks. In my view, we have reached a point where we should better capitalize on the efficiency and risk reduction benefits of standardizing and possibly managing all these functions centrally. I believe there are significant opportunities for further improvement.
Two Categories: Those That Should Be Local and Those That No Longer Need to Be Local
At this point, I want to return to the two questions I initially posed. Which functions of the Reserve Bank should be performed locally because they serve the needs of a specific Region and should be tailored accordingly; and which can be performed everywhere for the benefit of the entire System? Starting with activities that are inherently Region-focused, as per the Federal Reserve Act's original intent, which is to have a central bank that reflects the needs of different regions in the U.S. and is not solely dependent on Wall Street or Washington, these are activities where geography still matters.
Clearly, some work that has always been carried out differently by different Regions remains appropriately local today in both approach and content. I see no reason to reduce the number of Reserve Banks or change their geographical boundaries. Each Bank president has an independent voice in the FOMC regarding the appropriate course of monetary policy, and this should continue. Each president's views are shaped by the research of the Bank's economists, regional experts, inputs from the Bank's board of directors, and interactions with business leaders in the Region. Each Bank president contributes this perspective to discussions with their colleagues in Washington; this creates a view of the national economy as a whole and thus the direction policy should take. In addition to contributing to the development of monetary policy, each president interacts with businesses, financial, and nonprofit communities to position the Bank as an organization that brings together various stakeholders to address local economic issues such as workforce development, financial inclusion, and rural concerns. These activities are extremely valuable for fulfilling the Fed's mission and should continue. Each Reserve Bank also maintains oversight of member state banks and bank holding companies based on regional knowledge and expertise from local regulators, regional sectors, and economic trends. Local assets will continue to be important. This local expertise is also crucial when Reserve Banks extend credit to deposit-taking institutions.
Market operations have concentrated in New York due to its proximity to securities broker-dealers that facilitate the implementation of monetary policy through open market operations.
Now, let's move to a very different class of activity that is crucial for the overall functioning of the system and does not depend on geography.
These functions are increasingly becoming platform-based, technology-focused, and scalable. The list includes HR systems, payroll and benefits management, finance and accounting, procurement and vendor management, as well as payments, IT, and financial institution operations.
These functions are not better or more efficiently performed through geographical distribution. They are also not region-specific. They develop through integration, scale, and standardization. However, lower operational costs, reduced risk, and greater savings for American taxpayers come into play. Our philosophy in these functions should be "System first, then Bank." This has been the message I've communicated over the last three years regarding how our operations should be organized and managed in the Reserve Banks.
Turning Point: Why Is This Moment Different?
You may be asking why I am raising this now. Haven't central banks continuously adapted to changes in their surroundings, as I mentioned earlier? Why can't this evolution continue organically? The answer is that I do not believe this traditional approach will meet the needs of this moment and the U.S. economy for various reasons:
First and foremost, the external environment has changed. Technology cycles are quicker and more disruptive. Artificial intelligence (AI) poses an approaching storm threatening to change and, I believe, improve all organizations. The pace of technological change today means the Fed does not have the luxury of time to retreat and ponder changes. To catch this wave and not be drowned, we need more agility to capture efficiencies and manage risks, such as integrating cybersecurity and AI into our system processes.
Secondly, merging functions makes sense for competing in talent markets that are increasingly national and sometimes global. We will achieve greater efficiency through consolidation and also attract the best talent in finance, human resources, and procurement by offering people the opportunity to work in a national organization with more responsibility and impact.
Lastly, comparison with the private sector is unavoidable. Our IT costs are largely "off-market"; this is primarily due to applications being developed locally and the complexity of our offerings across the Banks. We are not leveraging existing economies of scale or risk reduction advantages across a broader spectrum. Other large organizations have long faced financial pressures to standardize, centralize, and in some cases, outsource. One of the most significant benefits of having CEOs from the private sector on Reserve Bank boards is that these executives can highlight where our costs are misaligned and how we can improve both efficiency and performance.
A Forward-Looking Path: Two Models for Operational Modernization
When addressing the future framework of Reserve Bank operations, one thing is clear: we will not return to a world where everything is done locally. Therefore, looking forward, I believe that two models warrant consideration for the Fed’s operational footprint to evolve further.
First is standardization with centralized System leadership. In this model, the existing physical presence of Reserve Banks largely remains the same, but every major support function (IT, HR, finance, procurement, vendor management, and facilities) is placed under a single senior leader responsible for managing that function on behalf of the entire System. This leader sets standards, makes decisions across the enterprise, manages vendors, and is accountable for performance across all 12 Regions. Local staff remains in place, but they work within a unified framework rather than 12 separate frameworks. System function leaders operate within the existing Federal Reserve management structure, reporting through Reserve Bank presidents and local boards while the Board of Governors provides oversight. This is not a restructuring that centralizes authority in Washington. It is a model that authorizes the System to act as a single business while preserving the governance architecture established by the Federal Reserve Act. This model captures a large part of standardization (lower cost, reduced risk, and greater consistency) without requiring the more challenging task of physical consolidation.
The second model goes even further. If an external consultant were asked to design the Fed's operating system from scratch, I believe it would be much closer to this second model. It takes everything from the first model and adds physical consolidation among core functions. Functions that do not need to be local (human resources management, payroll, finance and accounting, procurement, and some IT operations) are concentrated in a small number of operational centers in low-cost cities or cities with comparative labor skill advantages. If cost-saving opportunities require, certain activities should be outsourced. Specialized jobs that truly require regional presence remain in the Regions. Everything else shapes up according to the economy. The System benefits not only from the advantages of unified leadership and standardized processes but also from the full economic advantages of consolidated facilities and labor markets. Like the first model, the official legal structure of the Federal Reserve remains unchanged. System function leaders report through Reserve Bank presidents and local boards, and the Board of Governors provides oversight. What must change for this approach to succeed is not the structure of the Fed but the long-standing expectation that every significant operational decision requires consensus among the 12 institutions. This second model represents a realization of what operational modernization can achieve, widely adopted by large and well-managed organizations in both the public and private sectors.
Both models represent meaningful progress. However, it should be clearly stated that the first is an intermediate point, not a goal. The full benefits in terms of cost, resilience, cybersecurity, and capabilities are likely to be achieved only under the second approach. An explicit outcome of this second model could be that some Central Banks may face lower employment levels in the future. I believe we need to rethink the physical presence of Central Banks in the future, as seen with the closure of branches due to the disappearance of check processing.
Both models require a change in how operational decisions are made. A System where senior leaders manage functions across the enterprise necessitates a real delegation of authority; this means more authority than most current first vice presidents of Central Banks possess. Decisions regarding human resources management, IT architecture, procurement strategy, and facility standards should not be made regionally but at the System level. This requires not only a delegation of authority but a genuine shift away from consensus-based operational decision-making. The model of discussion and consensus-driven decision-making that has served us well in developing monetary policy is not ideal when it comes to executing our operations. A leader of a System function who must seek approval from 12 semi-independent institutions before taking action cannot be an effective leader. I believe we need a significant change in our approach to governance; we must distinguish between decisions that require consensus for effective change and those where consensus hinders effective change.
Closing: Protecting Through Modernization of Federal Design
The essence of this talk is that we need to centralize our operations more with respect to national business sectors and move away from the individual Reserve Banks managing operational infrastructure with a Bank mentality rather than a System mentality.
These national business sectors need strong leadership and governance, which does not always mean consensus among the 12 Reserve Bank presidents. Inefficient governance and overlapping jurisdictions lead to cost inefficiencies and unnecessary risks. On the other hand, I believe we have the opportunity to leverage our scale and capabilities across the System to achieve better outcomes for U.S. households and businesses.
Decentralization is a strength of the Federal Reserve's design; however, this is valid when it reflects the real strengths of regional differentiation, not when it aims for fragmentation on its own. Autonomy is a virtue; however, it shouldn't lead to costly repetitions that benefit no one. We owe this to the American people we serve. Tradition deserves respect; however, it shouldn't stand as an obstacle to necessary change.
Lastly, I want to emphasize that the operational excellence at the Federal Reserve depends on our willingness to standardize what needs to be standardized and centralize what needs to be centralized; this way, we can strengthen what must remain regional to meet the needs of a large and heterogeneous country. This is an important discussion and I thank everyone for their constructive participation.