{"id":130770,"date":"2023-11-28T19:35:50","date_gmt":"2023-11-28T19:35:50","guid":{"rendered":"https:\/\/www.techopedia.com\/?post_type=definition&p=130770"},"modified":"2023-11-28T19:35:50","modified_gmt":"2023-11-28T19:35:50","slug":"federal-reserve-fed","status":"publish","type":"definition","link":"https:\/\/www.techopedia.com\/definition\/federal-reserve-fed","title":{"rendered":"Federal Reserve (Fed)"},"content":{"rendered":"

What is the Federal Reserve?<\/span><\/h2>\n

The Federal Reserve, often referred to as “the Fed,” is the central bank of the United States. It was created in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system.<\/p>\n

The Federal Reserve is composed of three key entities:<\/p>\n

    \n
  1. The Federal Reserve Board of Governors<\/strong>: Consists of seven members who oversee the Federal Reserve System. They are appointed by the President of the United States and confirmed by the Senate.<\/li>\n
  2. Twelve Regional Federal Reserve Banks:<\/strong> Located throughout the U.S., serve as the operating arms of the Federal Reserve System. They are supervised by the Federal Reserve Board of Governors.<\/li>\n
  3. The Federal Open Market Committee (FOMC)<\/strong>: It is made up of the seven Board of Governors members and five of the regional Federal Reserve Bank presidents. This body is responsible<\/a> for directing open market operations and setting the country\u2019s monetary policy.<\/li>\n<\/ol>\n

    Together, these entities work to achieve the goals of maximum employment, stable prices, and moderate long-term interest rates <\/a>as mandated by Congress under the Federal Reserve Act.<\/p>\n

    In doing so, the Federal Reserve manages the nation’s monetary policy, ensures the stability of the financial system, supervises and regulates financial institutions, fosters the safety and efficiency of payment and settlement systems, and promotes consumer protection and community development.<\/p>\n

    How Does the Federal Reserve Work?<\/span><\/h2>\n

    \"5<\/p>\n

    The Federal Reserve utilizes several monetary policy tools to achieve its dual mandate goals of maximum employment and price stability:<\/p>\n

      \n
    1. Open Market Operations<\/strong>: By buying and selling U.S. Treasury securities<\/a> and other assets, the Fed adjusts the level of bank reserves and controls short-term interest rates.<\/li>\n
    2. Reserve Requirements<\/strong>: The Fed sets the minimum amount that depository institutions must hold in reserve against deposits made by their customers. This helps control the economy\u2019s overall monetary supply.<\/li>\n
    3. Interest Rates<\/strong>: Several key interest rates are directly controlled by the Federal Reserve, including the federal funds rate, discount rate, and interest paid on reserves. Adjusting these rates influences broader financial conditions.<\/li>\n
    4. Forward Guidance<\/strong>: Official communications from the FOMC about the likely course of future interest rates are widely followed and shape the expectations of market participants.<\/li>\n
    5. Asset Purchases and Sales<\/strong>: Buying and selling longer-term Treasury securities and agency mortgage-backed securities to ease or tighten broader financial conditions. These operations are commonly known as quantitative easing and tightening.<\/li>\n<\/ol>\n

      The FOMC meets regularly to assess economic conditions and determine the appropriate stance of monetary policy to take action that ultimately leads to achieving the Federal Reserve\u2019s mandated goals.<\/p>\n

      The FOMC\u2019s decisions are implemented by the Federal Reserve through its open market operations and interactions with the banking system.<\/p>\n

      Policy Tools Used by the Federal Reserve<\/span><\/h2>\n

      There are various indicators that tend to be cited by media outlets and financial analysts that are directly associated with the Federal Reserve and that the FOMC keeps track of to make policy decisions.<\/p>\n

      These are some of the most relevant ones:<\/p>\n