Federal reserve.
Definition
The central banking system of the United States, established in 1913, responsible for conducting monetary policy, regulating banks, and maintaining financial stability. It influences the economy by setting interest rates and controlling the money supply.
How it works · 5 phases
Step by step.
- Congress created the Federal Reserve through the Federal Reserve Act of 1913
- The Fed sets the federal funds rate to influence borrowing and spending
- It buys or sells government securities (open market operations) to adjust the money supply
- It sets reserve requirements for how much cash banks must keep on hand
- These actions aim to control inflation and promote maximum employment
Examples
Real-world.
- 1 The Fed lowering interest rates during recessions to stimulate the economy
- 2 Quantitative easing during the 2008 financial crisis
- 3 The Fed raising rates to combat high inflation
Key Fact
The Federal Reserve System has 12 regional banks and is governed by a Board of Governors appointed by the President.