Key Takeaways

  • Most large banks are members of the central banking system called the Federal Reserve System (commonly known as "the Fed").
  • The Fed's goals include price stability, sustainable economic growth, and full employment. It uses monetary policy to regulate the money supply and the level of interest rates.
  • To achieve these goals, the Fed has three tools:
  1. it can raise or lower reserve requirements - the percentage of its funds that banks must set aside and can't lend out;
  2. it can raise or lower the discount rate - the rate of interest that the Fed charges member banks to borrow "reserve" funds;
  3. it can conduct open market operations - buying or selling government securities on the open market.
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