Federal Reserve System
- The Federal Reserve System is the central banking authority in the United States. It functions as a financial agent for the U.S. government and maintains the reserve accounts of commercial banks. The Federal Reserve provides loans to commercial banks and has the authority to issue notes that make up the entire supply of paper currency in the country. Established by the Federal Reserve Act of 1913, it consists of the Board of Governors, twelve Federal Reserve banks, the Federal Open Market Committee, the Federal Advisory Council, and several member banks. It also has additional advisory councils. All national banks are required to be members of the Federal Reserve System, and state banks can also join if they meet the required qualifications. The Federal Reserve System regulates its member banks by adjusting the legal reserve ratio, altering the discount rate, and performing open-market operations. These measures influence the amount of new loans commercial banks can offer, thus helping regulate the money supply
- When the economy is overheating, the Federal Reserve System may increase the discount rate to reduce bank lending and cool down the economy.
- During a financial crisis, the Federal Reserve System can provide loans to banks to ensure they have sufficient liquidity.
- By adjusting the amount of money commercial banks are required to hold in reserve, the Federal Reserve System can influence the amount of money available for loans.