The Federal Reserve has following four components:
Functions of Federal Reserve:
- Administer the nation’s banking system to guard consumers.
- Preserve the stability of the financial markets and restrict potential crises.
- Be the apex bank for other banks and foreign banks
- Deliver financial services to the US Government
- Conduct the monetary policy and ensure its efficacy
The Federal Reserve manages the credit (which is the largest component of the money supply) and controls inflation. The Federal Reserve can limit credit and hence, raise interest rates and make credit more expensive. This reduces the money in the market, which controls inflation. When there is no inflation, the Federal Reserve lowers interest rate and avails cheap credit. This increases liquidity in the market, catalyzes business growth, and eventually cuts unemployment.