What Is the Federal Reserve?
School 03 — Investing Foundations
School 3 · Investing Foundations · About 3 minutes
The Federal Reserve — usually just called the Fed — is the central bank of the United States. Think of it as the bank for the banks: it does not sell stocks, but it controls how much money floats around in the economy, and that decision ripples into everything investors care about.
The Fed's One Main Goal
The Fed has one main goal: keep two numbers in check. Unemployment and inflation. Too many people out of work is bad. Prices rising too fast is bad. The Fed's job is to balance the two.
The Main Tool: The Federal Funds Rate
The Fed's primary tool is the federal funds rate — the interest rate banks charge each other for overnight loans. When the Fed pushes that rate up, banks raise the rates they charge their customers: mortgages, car loans, and credit cards all follow. When the Fed lowers it, borrowing gets cheaper across the whole economy.
Stepping on the Gas and the Brakes
When the economy slows down, the Fed lowers rates — stepping on the gas. Borrowing gets cheaper, people spend more, businesses invest, and jobs come back. When the economy grows too fast and inflation shows up, the Fed raises rates — stepping on the brakes. Borrowing gets expensive, spending cools, and prices settle down.
Open Market Operations and QE
The Fed cannot just turn a dial. To move rates, it buys and sells government bonds — called open market operations. After the Great Recession, it went further and bought long-term bonds too, aiming to push down mortgage rates. That program is called quantitative easing, or QE.
Key terms
- Federal Reserve (the Fed)
- the central bank of the United States; controls the money supply and sets short-term interest rates.
- Federal funds rate
- the interest rate on overnight bank-to-bank borrowing; the Fed's primary lever.
- Open market operations
- the Fed buying and selling government bonds to nudge interest rates up or down.
- Quantitative easing (QE)
- large-scale Fed purchases of long-term bonds to push long-term rates down.
- Dual mandate
- the Fed's goal of balancing maximum employment against stable prices.
The quiz
What Is the Federal Reserve? — Quiz
3 questions · pass with 2 correct
1.What is the Federal Reserve?
2.What is the Fed's dual mandate?
3.When the Fed raises the federal funds rate, what typically happens?