The
Federal Reserve System, popularly known as the Fed, is the
central
bank
of the U.S. The Fed plays many roles in the economy,
of which the most important is regulating the
money
supply.
That includes the currency in circulation, the
reserves held by banks, and the amount of money being deposited
and re-deposited in bank accounts.
The money supply is important to individuals
and businesses because the more money that’s available, the
easier and cheaper it is to borrow. And the less money that’s
circulating, the more expensive borrowing becomes. What’s
more, the cost of borrowing, sometimes called the cost of credit,
has a major impact on whether the economy grows or declines.
Because it can control the money supply through
its
open market
operations — by buying or selling securities
— the Fed influences the health of the economy. If it believes
the pace of growth is too rapid, it reduces, or tightens, the
money supply. Conversely, if growth slows or a recession seems
possible, the Fed increases, or loosens, the money supply.
Stops and starts
The Fed is actually the third central bank in the U.S. The first two, appropriately named the First Bank of the United States and the Second Bank of the United States, disappeared in part because of widespread fear they would become too powerful. Then, in 1913, Congress created the Federal Reserve System with an intricate system of checks and balances to prevent any one group, region, or political party from having too much power.
The money supply is important to individuals
and businesses because the more money that’s available, the
easier and cheaper it is to borrow. And the less money that’s
circulating, the more expensive borrowing becomes. What’s
more, the cost of borrowing, sometimes called the cost of credit,
has a major impact on whether the economy grows or declines.
