The Federal Reserve (Fed) is the main banking system of the United States. Even though they are private corporations, the Federal Reserve banks are regulated and supervised by the government strictly. It was created in the early 20th to promote financial stability. The Federal Reserve has a lot of influence over the U.S. economy and is very significant.

The Federal Reserve was created to act like a “bank for banks” in 1913 because of the Federal Reserve Act to make the American banking system more stable. In the 19th century, bank runs causing banks to collapse were quite common. Back then, people would rush to get their money out of their banks because they heard about other banks failing. Since banks don't have all of their money in cash with them, the bank would fail when all of the money had been taken out. This would in turn cause more and more bank runs. The Federal Reserve would solve this problem by taking in and providing the necessary funds for banks (Federal Reserve, 2021). Before the creation of the Fed, there were some failed attempts at making a stable banking system. After the Civil War, no bank branches would cross state borders in fear of a strong federal banking institution. As a response to this fear, most banks were unit banks. There were thousands of small tiny office-sized banks across the country (Federal Reserve, 2021). However, this flawed banking system caused financial instability leading President Woodrow Wilson to sign the Federal Reserve Act in 1913.

The Federal Reserve Act created a new currency-the Federal Reserve Note. To get this new currency into circulation, all national banks were required to get their money from their local reserve bank, but state banks didn’t need to (Federal Reserve, 2021). Three different bodies oversee and run the Federal Reserve. Those are the 12 Federal Reserve banks themselves, the Board of Governors, and the FOMC. There are 12 Federal Reserve banks in major cities around the country. Those cities are Boston, New York, Chicago, Philadelphia, Cleveland, Richmond, Atlanta, Minneapolis, Dallas, Kansas City, San Francisco, and St. Louis. Each of these Federal Reserve banks is in one of the 12 Federal Reserve districts. The Board of Governors is a government agency consisting of 7 members directly appointed by the President and confirmed by the Senate (Federal Reserve, 2023). They have 14-year terms and create policy regarding the Federal Reserve. The FOMC or the Federal Open Market Committee consists of the 7 governors from the Board of Governors, the chairman of the New York Federal Reserve Bank, and three other chairmen from the other Federal Reserve banks that keep alternating (Federal Reserve, 2023). The FOMC meets 8 times a year to determine monetary policy.

On June 12th, 2024 the FOMC held a press conference where they announced monetary policy and the state of unemployment and inflation in the US. They claim that inflation is slowly progressing towards the FOMC’s goal of 2% inflation although it is still high. They are also trying to keep unemployment low. They are also keeping the federal funds rate at around 5% (Federal Reserve, 2024). But this stance from the FOMC has gathered some criticism. Some newsletters say that the Fed is making a mistake by keeping rates the same since inflation has been decreasing and that this might cause the Fed to ease up on the rates in the fall, while others believe that inflation is already on the right track and the monetary policy set by the FOMC is beneficial (Shama, 2024).

The Federal Reserve plays a key role in setting monetary policy and gathering economic data from all over the country. It also has an important role in managing and preventing financial crises like the Great Depression or the recessions of this century (Federal Reserve, 2021).  The Federal Reserve has two main priorities that it has acted upon with the setting of discount windows, federal fund rates, and more. Those priorities are to keep unemployment as low as possible while also attempting to keep inflation in check (Federal Reserve, 2022). The Federal Reserve will play a major part in recovering from the current inflationary period, and the current monetary policy regarding inflation might even be a factor in the 2024 presidential election (Shama, 2024).