America depends on the Federal Reserve to act as the nation's central bank to help its economy run smoothly and meet it's economic goals. Similarly, the Federal Reserve depends on American citizens in order for its monetary policies to function. They work together so the government, consumers, and producers are happiest.

The Fed influences money and credit conditions to help growth, employment, and price stability. Money means cash in circulation and that people and businesses have in bank accounts. Credit means the amounts banks and other lender can lend.

The Fed works to prevent inflation or deflation. Inflation, which is caused by an excess of money and credit, hurts people on fixed incomes and discourages savings; prices go up and people have to pay more for products and services. Producers can't reap in as much profit when there is deflation, so it's harder for them to produce. If money and credit grows too slow, deflation can occur. In that case, there is little to lend, and a recession can result, meaning unemployment and a decrease in economic activity. Both inflation and deflation makes it difficult to plan for the future, as far as budgeting and saving.

To prevent these price shifts, the Fed uses different monetary policy tools. Reserve requirements are percentages of money or credit banks must keep on hand or on deposit at the Federal Reserve Bank. Banks make more money; they can lend out a certain percentage of a deposit so people can take out loans. The requirements rarely change to make it easier for banks to plan for the future. Discount rates are the rates of interest set by the Fed on short-term loans; this slows inflation by discouraging people to take out loans and purchase at inflated prices, so sellers lower their prices to balance supply and demand. In open market operations, the Fed buys government securities, which lowers federal funds rates (the interest rates banks change each other on short-term loans), and sells these securities so banks have less to lend and interest rates increase. These operations occur several times a week to prevent money and credit from being pushed the wrong way by forces like the public's demand for cash.

Transactions with foreign countries can affect the economy in America. When the value of the American dollar is strong (high), people spend less by buying abroad, where prices are higher; this causes deflation in the U.S. because Americans aren't spending enough in their own country, and the value of the dollar rises. When its value is weak (low), import prices rise and inflation can occur because not enough money is being spent abroad, and there is too much in circulation in America. In Fed intervention, the Fed works to balance the economy through the FX (foreign exchange) market. For instance, to push up the value of the American dollar, it raises interest rates. Foreigners then invest funds in the U.S. Their currencies are converted and the demand for the dollar is increased. The Fed can raise the value of the American dollar by using foreign currency to buy them, and can lower its value by selling them.

The Fed processes checks and cash. Banks order cash from the Fed when they need it, and ship it cash when they have too much. Checks can even be processed cross-country; for instance, if someone from Los Angeles writes a check in Philadelphia, the Philly bank credits the person's account and sends the check to the Federal Reserve of Philadelphia, then the check is sent to the Federal Reserve of Los Angeles where it goes to the bank of Los Angeles. The Fed processes one third of all checks written in America. Many of them are deposited electronically. High-tech machines are used for all sorts of transactions. Fedwire is a program that allows money to be transferred over seconds. ACH allows for constant, direct payments. There are also machines designed to detect bill denominations, extent of use, and authenticity.

Banks can borrow money from the Fed as well, although it is considered a last resort lender. It acts to prevent too much borrowing. Types of loans are adjustment credit, for overnight loans or short-term problems; seasonal loans, which are extended up to nine months to help in seasonal swings in deposits and loans; and extended loans, which are prolonged because of financial difficulties if banks have a plan to correct the problems. Banks aren't allowed to take advantage of interest or discount rates and make profits by borrowing, either.

The Fed lets the government borrow as well, and also takes on some of its financial responsibilities. It processes bids at Treasury Security auctions, redeems savings bonds, and sends bonds over computers.

The Fed stays involved in the banking system. It tries to keep it competitive by approving new banks and allowing bank mergers, as well as examining them and their information for security. If any problems or violations are found, it has the authority to suspend employees, and fine or close banks.

Employees of the Fed are chosen carefully. Members of the Board of Governors of the Federal Reserve are appointed to fourteen-year terms to prevent political pressures. The Fed is financially self-sufficient. It gives the Treasury the excess of what it took over what it spent. It also sets reserve requirements and has authority over Reserve Banks, which are banks that act like the Federal Reserve, but to lesser extents. For the public, the Fed frequently prints booklets or comics on the economy and how financial systems function.

The Fed is vital to the health of the American economy, but it can't survive without the involvement of American citizens.