Federal Reserve
BeginnerThe Federal Reserve, often called the Fed, is the central bank of the United States, responsible for monetary policy, supervising and regulating banks, maintaining financial stability and overseeing payment systems.
The Federal Reserve was created by the Federal Reserve Act of 1913, after a series of financial panics. It consists of a Board of Governors in Washington, D.C., twelve regional Federal Reserve Banks and the Federal Open Market Committee.
The Federal Open Market Committee sets monetary policy, mainly by setting a target range for the federal funds rate, the interest rate at which banks lend to each other overnight. It also uses tools such as buying or selling government bonds.
Congress has given the Fed a dual mandate: maximum employment and stable prices. The Fed interprets stable prices as inflation of 2% over time, measured by the personal consumption expenditures price index.
For example, when inflation rose sharply in 2022, the Fed raised its policy rate rapidly to cool the economy. During crises, such as in 2008 and 2020, it cut rates close to zero and bought large amounts of bonds.
The Board of Governors’ seven members are appointed by the President and confirmed by the Senate. The Fed is designed to be independent in its policy decisions, although this independence has at times been the subject of political debate.
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