The Fed's Functions
The Federal Reserve System works to promote the effective operation of the U.S. economy and, more generally, to serve the public interest. The specific duties of the Fed have changed over time as banking and economics have evolved.
by Federal Reserve Bank of St. Louis staff
The Federal Reserve System performs five functions to promote the effective operation of the U.S. economy and, more generally, to serve the public interest:
- conducts the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy;
- promotes the stability of the financial system and seeks to minimize and contain systemic risks through active monitoring and engagement in the U.S. and abroad;
- promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole;
- fosters payment and settlement system safety and efficiency through services to the banking industry and the U.S. government that facilitate U.S.-dollar transactions and payments; and
- promotes consumer protection and community development through consumer-focused supervision and examination, research and analysis of emerging consumer issues and trends, community economic development activities, and the administration of consumer laws and regulations.
Evolution of the Fed
to Provide for the Establishment of Federal Reserve Banks, to Furnish an Elastic Currency, to Afford Means of Rediscounting Commercial Paper, to Establish a More Effective Supervision of Banking in the United States, and for Other Purposes
Congress wanted to build a central bank system that could effectively promote monetary and financial stability and respond effectively to stresses in the banking system.1 They did not anticipate the many changes in the banking system or a nation that would transform throughout the 20th century from an agricultural to a service-based economy.
Monetary policy,2 probably the most well-known function of the Federal Reserve, is just one example of how the Fed has changed over the years. Monetary policy and open market operations developed slowly throughout the Fed's first 20 years. It was only in 1936, after the Banking Act of 1935 went into effect, that the Federal Open Market Committee as we know it took shape. The economic complications of World War II and the tensions between the Fed and the Treasury department contributed to a Fed that was focused more on day-to-day logistics than strategic policy. The first edition of the System's overview publication often called simply "Purposes and Functions," published in 1939, focused as much on check clearing and gold redemption as open market operations. The phrase "monetary policy" is nowhere to be found until the third edition published in 1954.
Although the focus has changed, much of the core of what the Fed does has stayed the same. For instance, the Fed supervises banks and works to stabilize the banking industry in order to prevent crises like the Panic of 1907. The Fed still helps banks coordinate payments, clears checks and electronic payments like direct deposit, and gets cash and coin to commercial banks, who can then get it into the hands of their many customers.
Congress has given the Federal Reserve many other responsibilities and opportunities over the years, from the Employment Act of 1946 to the Dodd-Frank Act of 2010 to the CARES Act of 2020. For more about what the Fed does today, explore "The Fed Explained" from the Board of Governors or watch a video explaining the Fed "In Plain English" from the economic education team at the St. Louis Fed.