How Does the Federal Reserve Work? - TheStreet Definition

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The Federal Reserve, commonly referred to with no disrespect as the Fed, is the central bank of the U.S. It conducts monetary policy, regulates banks, maintains the stability of the financial system, and provides financial services to U.S. banks, foreign governments and the public.

The Federal Reserve System consists of a seven-member Board of Governors headquartered in Washington, D.C. and 12 Reserve Banks located in major cities throughout the country. The District Feds, as they are called, are in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco. Each Federal Reserve Bank serves financial institutions and the public in a multistate district. A map on the Fed's Web site shows the 12 districts.

Fed governors are nominated by the president, who nominates two governors to serve as Fed chairman and vice chairman.

The Fed conducts monetary policy through its Federal Open Market Committee, which sets a target for the fed funds rate. The Fed then keeps the fed funds rate on target through open market operations.

Definitions of Financial Terms