Central banks, including the Federal Reserve, manage the money supply to guide economic growth. The Fed's primary tool has traditionally been the Fed funds rate. This is a targeted rate the Fed sets for banks to charge each other to store their excess cash overnight. The Fed funds rate impacts all other interest rates, including bank loan rates and mortgage rates.
The Fed also uses other monetary tools to increase the supply of money in the economy. The Fed uses the reserve requirement to tell banks how much of their money they must have on reserve each night. If it weren't for the reserve requirement, banks would lend 100% of the money you've deposited. Not everyone needs all their money each day, so it is safe for the banks to lend most of it out. However, the Fed requires that banks (on average) keep 10% of the money deposited on reserve. That way, they have enough cash on hand to meet most demands for redemption. When the Fed wants to restrict liquidity, it raises the reserve requirement. Since it's difficult to ask banks to change this, the Fed only does this as last resort.
The Fed's primary mandate is to manage inflation. The Fed reduces inflation by raising the Fed funds rate or decreasing the money supply. This is known as contractionary monetary policy.
However, the Fed must be careful not to tip the economy into recession. To avoid recession, and the resultant unemployment, the Fed must lower the Fed funds rate and increase the money supply. This is known as expansionary monetary policy.
