How the Fed Works

The Fed regulates financial institutions, acts as the U.S. government's bank, acts as a bank's bank, and is responsible for managing the nation's money. The Fed has two divisions: One group, the Board of Governors, is responsible for setting monetary policy and managing the nation's money; the other group, the 12 regional Reserve Banks, acts as the service division that carries out the policy and oversees financial institutions. The regional Reserve Banks represent the private sector. Both of these groups have the same goals.

In its role as money manager, the Fed has two primary goals:

It achieves these goals indirectly by raising or lowering short-term interest rates. Although these are two separate goals, the outcome of each is the same -- a stable economy. In the following sections, we'll discuss the goals and the way the Fed goes about achieving them.