What Is the Federal Reserve System (the Fed)?

What Is the Federal Reserve System (the Fed)?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

The Federal Reserve System, also known as the Fed, is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act. This system was established to provide the country with a safe, flexible, and stable monetary and financial environment.

The Federal Reserve System is composed of the Board of Governors, which is an independent agency of the federal government, and twelve regional Federal Reserve Banks located in major cities across the country. The Fed has several roles including: controlling inflation, managing monetary policy, maintaining the stability of financial institutions, providing financial services to depository institutions and the U.S. government, and protecting consumers’ rights in their dealings with banks.

Related Questions

1. Who governs the Federal Reserve System?

The Federal Reserve System is governed by the Board of Governors. It comprises seven members who are nominated by the President of the United States and confirmed by the Senate. Each serves a 14-year term.

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2. How does the Federal Reserve control inflation?

The Federal Reserve controls inflation by managing the amount of money circulating in the economy. They use tools such as the federal funds rate, which influences interest rates and hence borrowing costs. By raising or lowering this rate, the Fed can curb or stimulate economic activity, influencing inflation.

3. What is monetary policy?

Monetary policy refers to the process by which a central bank, like the Federal Reserve, controls the supply of money in the economy, often targeting an inflation rate or interest rate with the intention of promoting economic growth and stability.

4. Does the Federal Reserve print money?

The Federal Reserve does not physically print currency. This is the responsibility of the Bureau of Engraving and Printing. However, the Fed controls the amount of money in the economy by managing the reserve balances held by commercial banks.

5. What is the Federal Open Market Committee (FOMC)?

The Federal Open Market Committee (FOMC) is a part of the Federal Reserve System that is responsible for making key decisions about interest rates and the growth of the United States money supply. The committee is made up of the seven members of the Board of Governors and five Reserve Bank presidents.