The fed

The main objective of the Federal Reserve System (Fed) is to regulate the supply of money in circulation to maintain the economy growing without inflation. To achieve this goal, there are some tools in hand. The Fed can change reserve requirements to control the monetary supply. If it wants to get the economy out of recession, for example, the Fed can reduce the reserve, making available more money for loan and consequently stimulating the economy. On other hand, if the economy is expanding too quickly, the Fed can raise the reserve requirements, reducing the money for loan.
The Fed can also change the discount rate, which consists in the interest rate that the Fed charges on loans to member banks, to control the monetary policy. If the discount rate is high, the economy becomes unstable, because the banks increase the interest rates on loans, which decreases the money supply. However, if the discount rate is low, any bank might borrow money, it means that the money supply increases.
Finally, there is the major tool used by the Fed: the open-market operations. It involves the sale and purchase of government securities. When the Fed buys securities, the money supply increases, because the deposit in the account of the seller raises bank’s reserves and quantity of money to be lend. Nevertheless, if the Fed sells government securities, the buyer’s bank will use the deposits to purchase the securities. Soon, there will be less reserves and less money to be