Overview
The central bank in any country is the primary bank of that country. It is typically the institution which issues the country's currency and is the lender of last resort for that currency.
Federal Reserve
The federal reserve is a system of 12 regional banks in the United States which issues the US dollar. It was established in 1913 in order to provide stability to the United States financial system and to its economy.
The federal reserve controls the money supply in the United States through a few key mechanisms.
- Reserve Requirement - not an important lever of monetary policy anymore, the reserve requirement is a requirement imposed on banks that requires them to hold a certain amount of reserves against the deposits in the bank.
- Open Market Operations - where the Fed purchases assets in the open market with banking reserves that it issues. By issuing new bank reserves and purchasing assets (typically Treasury instruments), the Fed can increase the money supply in order to achieve a target level of interest rates.