In the previous module, you learned that the Federal Reserve System serves as the central bank of the United States. It has two parts: the Board of Governors, which is part of the U.S. government, and the 12 regional Federal Reserve Banks, which are privately owned. But what are the functions of the Federal Reserve System, and how does it serve them?

Today, the Federal Reserve’s functions fall into four basic categories: providing financial services to depository institutions, supervising and regulating banks and other financial institutions, maintaining the stability of the financial system, and conducting monetary policy. Let’s look at each in turn.

Provide Financial Services The 12 regional Federal Reserve Banks provide financial services to depository institutions such as banks and other large institutions, including the U.S. government. The Federal Reserve is sometimes referred to as the “banker’s bank” because it holds reserves, clears checks, provides cash, and transfers funds for commercial banks—all services that banks provide for their customers. The Federal Reserve also acts as the banker and fiscal agent for the federal government. The U.S. Treasury has its checking account with the Federal Reserve, so when the federal government writes a check, it is written on an account at the Fed.

Supervise and Regulate Banking Institutions The Federal Reserve System is charged with ensuring the safety and soundness of the nation’s banking and financial system. Each regional Federal Reserve Bank examines and regulates commercial banks in its district. The Board of Governors also engages in regulation and supervision of financial institutions.

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Maintain the Stability of the Financial System As we have seen, one of the major reasons the Federal Reserve System was created was to provide the nation with a safe and stable monetary and financial system. The Fed is charged with maintaining the integrity of the financial system. As part of this function, Federal Reserve Banks provide liquidity to financial institutions to ensure their safety and soundness.

Conduct Monetary Policy One of the Federal Reserve’s most important functions is the conduct of monetary policy. As we will see, the Federal Reserve uses the tools of monetary policy to prevent or address extreme macroeconomic fluctuations in the U.S. economy.