Federal reserve

Definition

The central banking system of the United States, established in 1913, responsible for conducting monetary policy, regulating banks, and maintaining financial stability. It influences the economy by setting interest rates and controlling the money supply.

How It Works

  1. Congress created the Federal Reserve through the Federal Reserve Act of 1913
  2. The Fed sets the federal funds rate to influence borrowing and spending
  3. It buys or sells government securities (open market operations) to adjust the money supply
  4. It sets reserve requirements for how much cash banks must keep on hand
  5. These actions aim to control inflation and promote maximum employment

Examples

  • The Fed lowering interest rates during recessions to stimulate the economy
  • Quantitative easing during the 2008 financial crisis
  • The Fed raising rates to combat high inflation
Key Fact

The Federal Reserve System has 12 regional banks and is governed by a Board of Governors appointed by the President.

Related Terms

Fiscal and monetary policy Interest rates Inflation and unemployment Functions of money

Study This Concept

Practice Federal Reserve with free review games in these units:

Economics Unit 4: Money and Banking