What Does the Federal Reserve Do? Your Top 10 Questions Answered About the Fed

The Federal Reserve, often called the Fed, is the central bank of the United States. It helps keep prices stable, supports job growth, and promotes a healthy financial system. The Fed’s decisions shape interest rates, inflation, and how easily people and businesses can borrow.

In this article, we answer the 10 most common questions people ask about the Fed. From how it works to who runs it, you’ll get clear and accurate answers. We’ll also explain how its actions affect interest rates, inflation, and the broader economy.

Table of Contents

1. 1. How does the Federal Reserve work?
2. 2. Who owns the Federal Reserve?
3. 3. Is the Federal Reserve a private bank?
4. 4. What are the functions of the Federal Reserve?
5. 5. How does the Federal Reserve fit into the U.S financial system?
6. 6. How does the Federal Reserve affect me?
7. 7. Who controls the Federal Reserve?
8. 8. Why was the Federal Reserve created?
9. 9. Why is the Federal Reserve important?
10. 10. What would happen if we didn’t have the Federal Reserve?
11. The Federal Reserve, explained

1. How does the Federal Reserve work?

The Federal Reserve works by guiding the U.S. economy to support stable prices, a low level of unemployment, and a healthy financial system. It does this by managing the money supply and helping control interest rates.

The Fed operates through a combination of national leadership and regional implementation. Here’s how the structure of the Federal Reserve supports its work:

• Board of Governors: Based in Washington, D.C., this group sets national monetary policy and oversees the entire Federal Reserve System. The Board helps ensure the Fed’s decisions serve the public interest.
• 12 Federal Reserve banks: Located across the country, these regional banks carry out policy decisions, supervise local banks, and report on economic conditions in their districts. They help connect national decisions to what’s happening on the ground.
• Federal Open Market Committee (FOMC): This group makes decisions about interest rates and the money supply. It includes the seven members of the Board of Governors, the president of the New York Fed, and four other Federal Reserve Bank presidents who rotate in one-year terms.

The Fed doesn’t print money, but it influences how much money flows through the economy. When the economy slows, the Fed can lower interest rates to encourage spending. When inflation is high, it can raise rates in an effort to bring it back down.

Banks can also borrow money from the Fed when needed, especially during periods of stress. This helps prevent disruptions in the banking system and supports public confidence. That’s why the Fed is often called the “lender of last resort.”

In short, the Fed keeps the financial system running smoothly—and steps in when the economy begins to show signs of stress.

2. Who owns the Federal Reserve?

No one truly “owns” the Federal Reserve. It was created by Congress in 1913 to serve the public and operates independently within the government. The Fed isn’t owned by banks, individuals, or the president.

Its structure is unique by design. The Board of Governors is a federal agency, while the 12 regional Federal Reserve Banks are organized similarly to private corporations. Member banks hold stock in their regional Federal Reserve Bank, but this stock doesn’t come with control or profit rights.

Federal Reserve Banks are not expected to earn a profit. Any net earnings—after expenses, setting aside funds for a surplus, and paying a small dividend to member banks—are returned to the U.S. Treasury.

3. Is the Federal Reserve a private bank?

The Federal Reserve is not a private bank, but it has some features that resemble one. It’s best described as a hybrid—part public, part private. The Fed Board of Governors is a government agency, while the regional Federal Reserve Banks operate with some private-sector traits.

The private elements help ensure local input, but policy decisions are made in the best public interest. The Fed does not aim to make a profit or serve shareholders. Rather, its mission is to support the economy, not to operate like a commercial bank.

4. What are the functions of the Federal Reserve?

The Federal Reserve has several core responsibilities that help keep the U.S. economy stable and functioning. These roles include managing inflation, supporting employment, overseeing banks, and keeping the financial system secure.

Here are some of the Fed’s main functions:

1. Monetary policy: The Fed uses monetary policy to manage inflation and support job growth. It does this by influencing interest rates and the availability of credit. This helps keep the economy from overheating or stalling.
2. Supervising and regulating banks: The Fed oversees certain banks to ensure they are operating safely and treating customers fairly. It conducts exams, enforces rules, and works to prevent financial crises.
3. Promoting financial system stability: The Fed monitors risks across the financial system. It steps in when needed to prevent disruptions that could harm the economy. This includes responding to crises like the 2008 financial collapse or COVID-19.
4. Providing financial services: You can think of the Fed as a bank for banks. It helps financial institutions move money securely through checks, wire transfers, and other payments. It also provides banking services to the U.S. Treasury.
5. Distributing currency: The Fed works with the U.S. Treasury to distribute the nation’s cash. While the U.S. Treasury makes the money, the Fed distributes it through the banking system.

Together, these functions support a stable economy and a reliable banking system.

5. How does the Federal Reserve fit into the U.S financial system?

The Federal Reserve plays a central role in the U.S. financial system. It helps guide the overall economy, supports the banking system, and keeps money flowing between people, businesses, and the government.

The Fed works with other key institutions, like the U.S. Treasury and the FDIC, to maintain financial stability. It doesn’t compete with banks—it supports them by offering services, setting certain rules, and acting as a safety net in times of crisis.

Through its monetary policy decisions, the Fed influences the cost of borrowing, the supply of credit, and the value of the dollar. Its actions ripple through the system, affecting everything from Wall Street to your local credit union.

Without the Fed, it would be much harder to coordinate responses to inflation, financial instability, or sudden economic shocks. It serves as the system’s anchor, providing direction and backup when needed.

6. How does the Federal Reserve affect me?

The Fed’s decisions affect nearly every part of your financial life—even if you’ve never thought about it. When the Fed raises or lowers interest rates, it becomes more or less expensive to borrow money. That affects your credit card bill, mortgage rate, car loan, and student debt.

The Fed also influences how much you earn on savings. Higher rates can mean more interest on your savings account or CD. Lower rates may mean you earn less on your savings, but can borrow money more affordably.

Inflation is another area where the Fed plays a key role. When prices rise too fast, the Fed may raise rates to cool spending and bring inflation down. That can slow the economy, but it also helps protect your purchasing power.

Here’s how you might feel some of the Fed’s decisions in your life:

• Mortgage and auto loan rates may rise or fall.
• Credit card interest might increase when the Fed is trying to curb inflation.
• Your savings account may earn more interest when interest rates are higher.
• It can be easier or harder to get a loan, depending on Fed policy.
• Job growth and wages are influenced by how the Fed supports the economy.

Even if you don’t borrow or save much, you’re still affected. The Fed’s work supports job growth, economic stability, and a sound banking system. From rent to retirement, its choices affect your day-to-day life.

7. Who controls the Federal Reserve?

The Federal Reserve is governed by the Board of Governors, a seven-member panel based in Washington, D.C. Each governor is nominated by the president and confirmed by the Senate to serve a 14-year term.

The Board oversees the 12 regional Federal Reserve Banks and helps set national policy. The FOMC, which includes Board members and Federal Reserve Bank presidents, makes decisions about interest rates and monetary policy.

While the Fed operates independently, it must report to Congress and is subject to oversight. This helps ensure accountability without day-to-day political pressure.

8. Why was the Federal Reserve created?

The Federal Reserve was created in 1913 in response to a long history of financial instability. Before then, financial crises often led to bank runs and widespread losses. The Panic of 1907 was so severe that private bankers like J.P. Morgan had to step in to restore order.

At the time, there was no system to manage the money supply or act as a lender of last resort. When people rushed to withdraw money, banks collapsed, often taking their life savings with them. Public trust in the financial system was weak.

Congress passed the Federal Reserve Act of 1913 to strengthen the economy and improve financial stability by creating a central bank, the Federal Reserve. The Fed’s purpose was to provide a more flexible, secure, and responsive system that could better handle economic shocks.

9. Why is the Federal Reserve important?

The Federal Reserve plays a key role in keeping the U.S. economy stable. It manages inflation, supports employment, and helps prevent financial crises. When the Fed acts wisely, it can reduce the severity of recessions and limit damage during economic shocks.

The Fed also helps maintain public confidence in the financial system. By supervising banks and promoting stability, it ensures people can access credit, protect their savings, and make financial decisions in a stable environment.

As history shows, without the Fed, the economy would be more vulnerable to chaos, panic, and long-term damage during times of stress.

10. What would happen if we didn’t have the Federal Reserve?

Without the Federal Reserve, the U.S. economy would lack a central authority to manage interest rates, respond to crises, or oversee the banking system. In times of stress, there would be no lender of last resort to keep money and credit flowing.

Before the Fed was created, bank failures and financial panics were common. The absence of a coordinated response made recessions deeper and recoveries slower. Restoring confidence during a crisis relied on private intervention or public panic subsiding on its own.

Today, the Fed plays a stabilizing role that supports long-term economic health. Without it, managing inflation, protecting the dollar’s value, and keeping the financial system running smoothly would likely be far more difficult.

The Federal Reserve, explained

The Federal Reserve touches nearly every part of the U.S. economy, even if you rarely hear about it in daily life. From setting interest rates to guiding the response during economic downturns, the Fed helps shape the environment in which people borrow, save, and invest.

Its work affects more than Wall Street—it affects your wallet. Understanding what the Fed does can help you make smarter financial choices, especially when it comes to managing debt, saving for the future, or adjusting to changes in the economy.

If you’re curious about what those decisions mean for your money, here are some helpful next reads:

• How Much Interest Would You Earn on a Million Dollars? 
• How Much Money Do You Need to Live Off Interest? 
• Why Money Is Important: Benefits and Downsides 
• Will the U.S. Dollar Collapse? Our Analysis for 2025