The Modern Federal Reserve System
Fed Functions
The Federal Reserve System’s Traditional Functions
Conducting the Nations’ Monetary Policy
Supervising and Regulating Financial Institutions
Providing Payment Services to Financial Institutions
Conducting the Nation’s Monetary Policy
The Federal Reserve System’s primary function is to conduct
monetary policy. Monetary policy is used to achieve the Fed’s
primary economic goals of maximum employment, price
stability, and moderate long-term interest rates.
Monetary Policy Tools
Open market operations—The purchase and sale of U.S. Treasury
and federal agency securities by the Federal Reserve System through
the Federal Open Market Committee; the Federal Reserve’s principal
tool for implementing monetary policy.
The discount window—Federal Reserve lending programs to
financial institutions.
The reserve requirement—The percentage of a bank’s deposits it
is required to hold as cash in its vaults and/or on deposit with
the Federal Reserve.
Supervising and Regulating Financial
Institutions
The Federal Reserve System is charged with helping to protect
the integrity of the nation’s financial institutions. The Fed
examines and regulates depository institutions to help ensure
the safety and soundness of the financial system, to promote
stability in financial markets, and to promote compliance with
applicable laws. Regulations are written by the Board of
Governors of the Federal Reserve System, and the Federal
Reserve Banks supervise the institutions. Through supervision
and regulation, the Fed reinforces the public’s confidence in
the banking system.
Providing Payment Services to Financial
Institutions
The Federal Reserve System provides services to depository
institutions and the federal government. Just as banks hold
cash and process checks and electronic payments for
customers, the Fed holds cash reserves and processes checks
and electronic payments for depository institutions.