What does the Federal Reserve do?
The Federal Reserve acts as a bank for banks. It holds bank deposits, lends money to financial institutions, and facilitates the process by which banks borrow funds from each other.
The Federal Reserve also ensures the smooth operation of the banking system and guides the nation's economy by managing U.S. currency and by steering interest rates.
The Federal Reserve System, or the Fed, has five main responsibilities:
Monitor and attempt to guide the economy. The Fed establishes an interest rate used by banks for ultra-short-term loans. Called the federal funds rate, it influences the rates that financial institutions charge to consumers. This "monetary policy" can slowly nudge consumer prices higher or lower.
Maintains a stable financial system. The Fed monitors the banking system, looking to minimize widespread risk.
Monitors the health of U.S. banks to manage the risk of individual financial institution failures.
Facilitates a national payment system. The Fed enables the transfer of massive sums of money between financial institutions as well as the government.
Serves to enhance consumer protection and community economic development by supervising and regulating the U.S. financial framework.