U.S. Central Bank
As the nation’s central bank, the Federal Reserve System has three major responsibilities: monetary policy, payments services, and the supervision and regulation of financial institutions.
Using the tools of monetary policy, the Federal Reserve can affect the volume of money and credit and their price, that is, interest rates. In this way, it influences employment, output, and the general level of prices. The goals of monetary policy are maximum employment, stable prices, and moderate long-term interest rates.
The Federal Reserve provides payments services in two capacities: as a bankers’ bank and as the U.S. government’s bank.
As a bankers’ bank, the Federal Reserve serves financial institutions, much as commercial banks serve their customers.
In this role, Reserve Banks:
- Distribute currency and coin
- Provide check-clearing services
- Transfer funds and securities electronically on the nationwide FedWire network
- Provide automated clearinghouse (ACH) services (the electronic deposit and debit of funds)
These services promote the smooth functioning of the financial system and the efficiency and technological development of the payments system.
As the U.S. government’s bank, the Federal Reserve:
- Maintains the U.S. Treasury’s funds account and clears Treasury checks drawn on that account
- Markets and redeems government securities and savings bonds
- Conducts nationwide auctions of Treasury securities
Banking Supervision and Regulation
The Federal Reserve works with federal and state financial authorities to supervise and regulate the U.S. banking system. The Fed’s main objectives in this role are to ensure the safety and soundness of the banking system, to protect consumers in credit activities, and to enforce banking laws and regulations.
Its activities include:
- On-site examinations of state member banks and bank holding companies
- Safety and soundness, consumer protection, information systems, and fiduciary examinations
- Processing financial institutions’ applications for mergers or other banking activities
- Monitoring the financial condition of financial institutions