The Fed and Money

However, the Fed can creates an environment that is conducive to economic growth. The Fed does that by pursuing a goal of price stability - that is, by maintaining inflation at a rate that does not affect business or household spending decisions.



Inflation is caused by excess growth of money and credit relative to the supply of goods and services in the economy. Money includes cash in circulation, plus the deposits that people and businesses have in bank accounts; credit refers to the funds that banks and other lenders can lend. The Fed must make sure that money and credit don't grow too rapidly or slowly.






The Fed must see to it that money and credit grow at an appropriate pace - a pace conducive to sustained economic growth and an inflation rate that does not affect business or household decisions. They often do this by buying and selling previously issued U.S. Government securities, or IOUs of the federal government.



The Fed changes the money supply by increasing or decreasing reserves in the banking system through the buying and selling of securities. The changes in the money supply, in turn, affect interest rates.