The Federal Reserve System: Introduction

Introduction

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What are the three tools used by the Federal Reserve System to regulate the money supply in the United States? How does their use affect you as a consumer? Who is the head of the Federal Reserve Board? You can find the answers to these questions here.

Who decides how much banks should keep in reserve? The decision is made by the Federal Reserve System (popularly known as "the Fed"), a central banking system established in 1913. Most large banks belong to the Federal Reserve System, which divides the country into twelve districts, each with a member-owned Federal Reserve Bank. The twelve banks are coordinated by a board of governors.

The Tools of the Fed

The Fed has three major goals:

Price stability
Sustainable economic growth
Full employment

Recall our definition of monetary policy as the efforts of the Federal Reserve System to regulate the nation's money supply. We also defined price stability as conditions under which the prices for products remain fairly constant. Now, we can put the two concepts together: the Fed seeks to stabilize prices by regulating the money supply and interest rates. In turn, stable prices promote economic growth and full employment - at least in theory. To conduct monetary policy, the Fed relies on three tools: reserve requirements, the discount rate, and open market operations.

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