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The Federal Reserve, the U.S.’s independent central bank, impacts the lives of U.S. citizens on a daily basis. Some of its actions are widely reported in the media. Others are not well-known, but all of the Fed’s actions affect how consumers spend and save money.
Key Takeaways
- The Federal Reserve, or “the Fed,” acts as the central bank of the United States.
- The Fed is largely responsible for adjusting the money supply and interest rates.
- The Fed also supports the banking sector by acting as a lender of last resort.
What Is The Fed?
The Federal Reserve, commonly referred to as the “Fed,” is an independent agency of the U.S. Federal Government. That means it can make decisions without approval from the president or Congress (although appointees are chosen by the president and approved by the Senate).
The Fed has three specific goals: maximum sustainable employment, stable prices, and moderate long-term interest rates. It accomplishes its goals by performing four basic duties: conducting monetary policy, supervising banks, maintaining stability of the financial system, and providing financial services to the banking system.
$6.67 Trillion
The total assets on the Federal Reserve’s balance sheet, as of June 2025.
What It Means to You
The Federal Reserve acts behind the scenes in many ways, from clearing checks to processing electronic transfers. But it also influences our lives in less obvious ways.
Setting Interest Rates
One of those ways is by setting interest rates. If you want to take out a mortgage, apply for a credit card, or just put your paycheck in a high-yield savings account, the interest payments will be calculated based on the Federal funds rate. This is the interest rate for short-term loans between banks.
Supporting Employment
These interest rates also affect hiring decisions. If the Fed expects an economic slowdown and wants to create more jobs, it can reduce interest rates and make it cheaper to borrow money. That encourages businesses to expand and hire more employees.
Adjusting Money Supply
The Fed is also responsible for adjusting the money supply. When the Fed buys securities in the market, like Treasury bonds, it increases the amount of money in circulation. If there is too much money in circulation, the Fed can sell some of its bonds to bring cash out of circulation.
Maintaining a Stable Banking System
Other duties center on supervising banks to ensure that savings deposits are safe and the bank does not overstretch itself. One of the Fed’s most important functions is to act as the lender of last resort for banks with short-term liquidity issues. If a commercial bank runs low on cash, it can take out an overnight loan through the Fed’s discount window.
Does the Federal Reserve Print Money?
No, the Federal Reserve does not literally print money—that’s the job of the Bureau of Engraving and Printing, for paper notes, or the U.S. Mint, for coinage. However, the Fed does “create” money that it lends out to other banks, or uses to buy bonds on the open market to increase the money supply. These new dollars are introduced to the economy as electronic credits to banks’ reserve accounts, rather than actual paper money.
Who Pays for the Federal Reserve?
Unlike other government agencies, the Federal Reserve is not funded through taxes. Instead, the Fed pays its bills with the income it receives from the assets on its balance sheet—mostly Treasurys, as well as mortgage-backed securities and interest on interbank loans. Any surplus income is remitted to the U.S. Treasury.
Who Controls the Federal Reserve?
The Federal Reserve has an unusual private-public ownership structure, reflecting the interests of both the banking industry and the public at large. Each of the 12 Federal Reserve Banks is structured as a separate corporation, jointly owned by the member banks in its district. However, the Board of Governors is an independent federal agency whose members are appointed by the president and confirmed by the Senate.
The Bottom Line
Financial pundits like to focus intently on the Fed’s actions. But the actions of the Federal Reserve affect everyone, from encouraging employment to making it easier to buy goods and services.
When people lose jobs or prices rise too quickly, the effects are felt by all consumers. The Fed’s role in maintaining the balance is paramount to sustaining a stable economy.
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