The Federal Reserve in the United States acts as the country's central bank. It has a mandate to promote maximum employment, stable prices and moderate long-term interest rates.

The “Fed” has three main functions:

–Provides and maintains an effective payments system,

–Supervises and regulates banking operations

–Conducts monetary policy.

Structure of the Federal Reserve System:

A Board of Governors in Washington is apppointed by the President and approved by the Senate, to administer Reserve banks and branches in 12 districts around the country. The Board represents the government. The banks and branches represent the private sector.

Open Market Operations:

This is the most important of the Fed's tools used to conduct monetary policy. A Federal Open Market Committee administers the buying and selling of U.S. government securities on the open market to influence short-term interest rates and growth of money and credit.

Discount Rate:

This is the interest rate the Federal Reserve Banks charge financial institutions for short-term loans of reserves.

Reserve Requirement:

This is the percentage of deposits in demand deposit accounts that financial institutions must set aside and hold in reserve. If the Fed raises the reserve requirement, banks have less money to lend, which restrains the growth of the money supply. On the other hand, if the Fed lowers the reserve requirement, banks have more money to lend and the money supply increases. The Fed rarely changes the reserve requirement.

Lender:

The Fed offers discount rate loans to help banks meet short-term needs — a buffer to maintain steady reserve demand and supply.