Purpose and goals of the Federal Reserve

Summary

The Federal Reserve System (the Fed) was created in 1913 to reduce the risk of banking panics and bank runs and to provide more effective supervision of the U.S. banking system. Although it is an instrument of the U.S. government, it is structured to operate independently of day-to-day political control. Congress established three core monetary-policy objectives: maximizing employment, stabilizing prices (often interpreted as about 2% average inflation), and moderating long-term interest rates (the first two are commonly called the Fed’s “dual mandate”). Beyond monetary policy, the Fed’s purposes include serving as the central bank for the United States, supervising and regulating banks, protecting consumer credit rights, and maintaining financial-system stability by containing systemic risk. It also provides financial services to depository institutions, the U.S. government, and foreign official institutions, and helps facilitate the exchange of payments across regions. Operationally, the Fed helps prevent disruptions in the banking system by acting as a lender of last resort, supporting liquidity during short-term fluctuations through mechanisms like the discount window, and maintaining a national check-clearing system.

Key Points

• 1

  Congress’s monetary-policy goals for the Fed are maximum employment, stable prices (around 2% inflation on average), and moderation of long-term interest rates.

• 2

  The Fed’s broader responsibilities include central banking functions, bank supervision and regulation, financial-system stability, consumer credit protection, and payment and liquidity services.

• 3

  To reduce banking panics and bank runs, the Fed supports liquidity (including lender-of-last-resort lending) and helps ensure smooth check clearing and payments across the U.S.