The Federal Reserve serves as the central bank of the United States. Commonly known as the Fed, it is an independent organization established by Congress on December 23, 1913. Before the creation of the Fed, the U.S. lacked a formal institution for overseeing and implementing monetary policy. The Federal Reserve consists of a network of entities known as the Federal Reserve System, which includes 12 regional central banks situated in major cities across the country. The architects of the Federal Reserve Act intentionally dismissed the idea of a single central bank, opting instead for a central banking “system” characterized by three main features: a central governing Board, a decentralized structure of 12 Reserve Banks, and a blend of public and private elements.

The primary objectives of the Fed are to foster sustainable economic growth, maintain high employment levels, moderate long-term interest rates, and safeguard the purchasing power of the U.S. dollar. To achieve these goals, the Federal Reserve undertakes five key functions that support the effective functioning of the U.S. economy and serve the public interest. These functions include: conducting the nation’s monetary policy to encourage maximum employment, stable prices, and moderate long-term interest rates; promoting the stability of the financial system while minimizing systemic risks through active monitoring and engagement both domestically and internationally; ensuring the safety and soundness of individual financial institutions and assessing their overall impact on the financial system; enhancing the safety and efficiency of payment and settlement systems through services to the banking sector and the U.S. government; and advocating for consumer protection and community development through focused supervision, research on emerging consumer issues, and the administration of consumer laws and regulations.

Although the Fed operates independently, it is subject to Congressional oversight. The Federal Reserve System comprises three main entities: the Board of Governors, the Federal Reserve Banks (Reserve Banks), and the Federal Open Market Committee (FOMC). The Board of Governors is a federal agency consisting of seven members appointed by the President, who report to and are accountable to Congress. This Board provides general guidance for the System and oversees the Reserve Banks.

The United States is divided into 12 Districts, each with its own incorporated Reserve Bank. These District boundaries were established based on trade regions that existed in 1913 and relevant economic factors, which means they do not necessarily align with state lines. Each Reserve Bank is responsible for a specific geographic area and operates independently under the supervision of the Board of Governors. The banks generate income through interest on government securities, services to banking institutions, foreign currency transactions, and interest on loans to depository institutions. This income funds the Fed’s operations, with any surplus returned to the U.S. Treasury.

The Federal Reserve is the largest banking customer in the U.S., managing all revenue from tax dollars and government payments. Additionally, the Fed is responsible for selling and redeeming government securities, including bonds, notes, and Treasury bills. It also issues all paper and coin currency and removes damaged currency from circulation. The FOMC convenes at least eight times a year to determine whether to adjust monetary policy by raising or lowering the federal funds rate, which is the interest rate at which banks lend to each other overnight to meet reserve requirements.

Within the Federal Reserve System, responsibilities are shared between the Board of Governors in Washington, D.C., and the Federal Reserve Banks and Branches, which represent the System’s operational presence nationwide. While the Federal Reserve maintains regular communication with the Executive branch and congressional officials, its decisions are made independently.

The Federal Reserve employs various methods to influence the American money supply, with the ability to increase or decrease the amount of currency in circulation being paramount. The Fed can buy or sell government securities to its primary traders, which either injects additional Federal Reserve Notes into circulation or withdraws excess paper money from the economy. The Fed also collaborates with the U.S. Mint to print more paper money or destroy unnecessary currency.

Another significant power of the Fed is its influence over short-term interest rates, achieved by adjusting the default rate at which it lends money to other banks. Since this default rate is a key factor in determining the nationwide prime interest rate, the Fed’s actions can indirectly affect the yields on interest-accruing assets, thereby influencing investor behavior and overall market trends. Specifically, the rate at which the Fed lends to depository institutions is known as the Discount Rate, which is set above the nominal rate—the rate at which depository institutions lend to each other to meet reserve requirements at the Fed. The nominal rate is commonly referred to as the Federal Funds Rate and is determined through open market operations. Given that the money supply impacts the overall trade balance in currency markets, foreign exchange traders closely monitor the Federal Reserve's actions.