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Federal Reserve Bank

By: Angela Howard Email
By: Angela Howard Email

Central banks are responsible for controlling the monetary policy of their countries. Essentially, this means that one of their key jobs is to manipulate the money supply in that country to meet its economic goals (such as market growth). Here in the U.S., the central bank is the Federal Reserve (commonly referred to as "the Fed").
The “money supply” is so important because, from an economic standpoint, the availability of money doesn't just affect what we're able (or not able) to buy. Factors such as inflation, employment rates, and market growth are all affected by the money supply.
When the economy is hurting, it's often because the money supply is low. One way to counter this is by simply increasing the amount of money, or liquidity, that is present in the economy. Conversely, if the economy is growing too fast (a sign of bad inflation to come), decreasing the money supply is often the Fed's solution.
There are three main ways that the Federal Reserve is able to alter the money supply:
Reserve requirements
Interest rates
Open-market operations
As a rule, banks are mandated to keep a certain percentage of all deposits in the bank. This is known as the "reserve requirement." The Fed sets the reserve requirement for U.S. banks. By decreasing the reserve requirements, more money is available for the bank to lend out, and the money supply increases.
Contrary to what many believe, the Fed doesn't set the interest rates you pay on your mortgage (because it can't). You can bet that their actions trickle down to the consumer level.
The Fed has direct control over the "discount rate," the rate the Fed charges banks that borrow from it. The Fed also has some level of indirect control over the "federal funds rate," the rate that banks charge each other for overnight federal loans.
From an economic perspective, interest rates are the "cost of money." Therefore, decreasing interest rates lowers the cost of money and increases the money supply. The Fed can also add or take money out of the system by buying or selling Treasury securities in the open market.


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