Federal Reserve

The Federal Reserve — commonly called the Fed — is the central bank of the United States. Created by Congress in 1913, it operates under a dual mandate: keep prices stable and promote maximum employment. It also supervises and regulates banks, maintains the stability of the financial system, and provides banking services to the U.S. government and to commercial banks.

The Fed pursues its mandate through monetary policy. Its primary tool is open market operations, run by the Federal Open Market Committee (FOMC): buying government securities injects money into the banking system and pushes interest rates down, while selling securities drains money and pushes rates up. The Fed also sets the discount rate — the rate it charges banks that borrow directly from it — and sets reserve requirements for banks.

Fed policy ripples through the entire economy. When the Fed eases (expansionary policy), borrowing gets cheaper, which tends to stimulate spending, business investment, and securities prices. When it tightens (contractionary policy), rates rise and economic activity cools — the trade-off it accepts to fight inflation.

The Federal Reserve is a staple of the SIE, Series 6, and Series 65 exams. Know the tools of the Fed, which direction each moves the money supply, and the key benchmark rates — the federal funds rate, discount rate, and prime rate — including how they relate to one another.