Definition
The Federal Reserve, often called the Fed, is the central bank of the United States. Created by Congress in 1913, it sits at the center of the nation's monetary and financial system, with a degree of independence from day-to-day political control.
Its system combines a central Board of Governors with twelve regional Reserve Banks. The Federal Open Market Committee, which brings governors and regional bank presidents together, sets the direction of monetary policy.
Why it matters
How it works
The Fed influences the economy mainly by steering short-term interest rates and the supply of bank reserves. Its principal tool is open market operations, the buying and selling of government securities, which adjusts the amount of reserves in the banking system and moves the key policy rate. It also lends to banks through the discount window and sets reserve and capital requirements. When inflation runs high, the Fed tightens; when the economy is weak, it loosens. Beyond policy, it regulates banks and provides emergency liquidity during crises, a role designed to keep a localized shock from spreading into a system-wide collapse.