The Fed provides banking services to the federal government. It maintains a checking account for the Treasury Department and processes payments, such as Social Security checks and IRS refunds. It helps the government finance its activities. When the Treasury Department auctions government bonds, the funds gained from such sales are deposited into the Federal Reserve Bank of New York. The Fed also issues paper currency and takes worn or damaged bills out of circulation.

     The Fed provides banking services to banks. One service is check clearing, the process by which banks record whose account gives up money and whose account receives money when someone writes a check. The Fed sends out bank examiners to supervise lending practices and other activities of member banks. The Fed also protects consumers by enforcing truth-in-lending laws.

     Banks often lend each other money from their reserve balances. These funds are called federal funds. The interest rate that banks charge each other for these is called the federal funds rate. Banks can also borrow directly from the Federal Reserve.

     The Federal Reserve is best known for its role in regulating the nation’s money supply. The law of supply and demand affects money as well as the rest of the economy. Too much money in the economy leads to inflation. Ideally, the Fed tries to increase the money supply by the same rate as the growth in the demand for money.