Legal Definitions - Federal Reserve System

The Federal Reserve System is the central bank of the United States. It is responsible for setting credit and monetary policies, regulating the amount of credit that can be extended on any security, and determining the reserves that depository institutions must maintain. The Federal Reserve System was established by the Federal Reserve Act of 1913 and is made up of 12 central banks supervised by a Board of Governors.

For example, if the Federal Reserve System determines that the economy needs a boost, it may lower the discount rate charged by Federal Reserve Banks, making it cheaper for banks to borrow money. This can encourage banks to lend more money to businesses and individuals, which can stimulate economic growth.

Another example is if the Federal Reserve System determines that inflation is becoming a problem, it may increase the reserves that depository institutions must maintain. This can reduce the amount of money available for lending, which can help to slow down inflation.