Federal Reserve

The central bank of the United States, responsible for monetary policy, banking supervision, and maintaining financial stability.

The Federal Reserve was established by Congress in 1913 after a series of financial panics exposed the need for a lender of last resort. It operates as a network of twelve regional Federal Reserve Banks overseen by a Board of Governors in Washington, DC. The Fed has a dual mandate from Congress: maximum employment and stable prices (interpreted as approximately 2% annual inflation).

The Fed's primary tools are the federal funds rate target, open market operations (buying and selling Treasury securities to influence the money supply), and reserve requirements. Since the 2008 financial crisis it has also used unconventional tools — quantitative easing (large-scale asset purchases) and forward guidance (communicating future policy intentions to shape market expectations).

Fed decisions have enormous ripple effects across global markets. When the Fed raises rates, borrowing costs rise throughout the economy, the dollar typically strengthens, and growth-sensitive assets like equities often fall. Markets closely watch every FOMC meeting and parse the Fed Chair's statements for any signal about the future path of policy.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.