Federal Reserve
Plain definition
The central bank of the United States, created in 1913, charged with conducting monetary policy, supervising banks, and maintaining financial stability.
In economics
The Fed pursues a dual mandate: maximum employment and stable prices (about 2% inflation). It sets the federal funds rate target, conducts open market operations, and since 2008 has used tools like quantitative easing and interest on reserves. It consists of the Board of Governors and 12 regional Reserve Banks.
Example
In 2022, with inflation surging, the Fed raised the federal funds rate from near zero to over 4% within a year. Mortgage and credit-card rates climbed, spending cooled, and inflation began falling, showing how the Fed's policy rate transmits through the economy.
The Federal Reserve is confused with the federal government or Treasury. The Fed is an independent institution: it does not set taxes or spending (fiscal policy), and its officials are not elected. Its decisions can conflict with what the president or Congress wants.