The Federal Reserve: Duties

The Federal Reserve provides the U.S. with a “safe, flexible and stable monetary and financial system.” Since 1977, it has operated under a “dual mandate” from Congress to foster economic conditions that achieve both stable prices and maximum sustainable employment – and it’s also charged with moderating long-term interest rates. (For related reading, see Breaking Down the Federal Reserve’s Dual Mandate.)

The Federal Reserve System performs five key functions in the public interest to help promote a healthy U.S. economy:

1. Conducting monetary policy.

The primary function of the Federal Reserve System is to conduct monetary policy. The Federal Open Market Committees sets U.S. monetary policy in accordance with its mandate to promote stable prices, maximum employment and moderate long-term interest rates (monetary policy is covered in more detail in the following section of this tutorial).

2. Promoting financial system stability. 

The financial system in the U.S. is regarded as stable when its financial institutions and markets provide people, communities and businesses the resources, products and services they need to invest in and benefit from a healthy economy. To keep the financial system stable, the Fed monitors the links between investors, savers, borrowers and businesses – at home and abroad. The goal is to make financial institutions and markets more resilient, so they can bend without breaking during times of distress.

3. Supervising and regulating financial institutions and activities.

The Federal Reserve System is charged with protecting the integrity of the financial institutions in the U.S. by promoting “the safety and soundness of individual financial institutions and [monitoring] their impact on the financial system as a whole.” It oversees a broad array of financial entities, including bank holding companies (the largest segment supervised), state member banks, savings and loan holding companies, foreign banks operating in the U.S. and others. In doing so, the Fed reinforces the public’s confidence in the banking system.

4. Fostering payment and settlement system safety and efficiency.

The Fed provides services to the federal government and depository institutions. This is similar to the way your bank holds cash and processes checks and electronic payments for you: The Fed provides these same services to depository institutions, including savings banks, savings and loan associations and credit unions.

As banker and fiscal agent for the U.S. Treasury, the Fed also provides banking and securities services for the government, chiefly through depository institutions. The Reserve Banks provide the U.S. Treasury with a checking account, and when the government pays for something, the payment is typically cashed by or deposited in a commercial bank. The Fed processes the payment and deducts the amount from the Treasury's account. Much of this is done electronically through the Treasury Direct system.

While the Treasury produces U.S. paper money and coin, it’s the Fed’s responsibility to put newly produced money into circulation to meet public needs, as well as to destroy money that Is no longer fit for circulation. 

5. Promoting consumer protection and community development.

A Fed survey shows that most American families are involved in the financial services marketplace – as bank account holders, credit card users and/or borrowers. The Fed helps ensure that the financial institutions it supervises comply with the laws that protect consumers. These laws govern consumer credit to help ensure that banks and other financial institutions are acting in the public’s best interest. Examples are the Truth in Lending Act, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act and the Truth in Savings Act.