What is the Fed?

Question: What is the Fed?

Answer: The Federal Reserve System (Fed) was created in 1913 to be the nation's central bank. As the central bank, it loans money to the nation's vast network of private banks. This gives it the power to regulate the economy by making the money it loans expensive, by raising interest rates, or cheap to borrow, by making rates low.

This economic power allows the Fed to set monetary policy. Setting low interest rates is called expansionary monetary policy, and makes the economy grow faster. If the economy grows too fast, it triggers inflation. Ongoing inflation is like an insidious cancer that destroys any benefits of growth. For this reason, in recent years the Fed's primary responsibility has been to manage inflation.