What is the role of the Federal Reserve in the U.S. economy?

The Federal Reserve, often referred to as the Fed, plays a crucial role in the U.S. economy primarily by conducting monetary policy and maintaining financial stability. Monetary policy involves managing the money supply and interest rates to influence economic activity, control inflation, and promote employment. The Fed adjusts interest rates through open market operations, discount rate changes, and reserve requirements, aiming to achieve economic stability and growth.

In addition to managing monetary policy, the Fed works to ensure the stability of the financial system by acting as a lender of last resort, monitoring and regulating banks, and providing necessary financial services to the government and financial institutions. This dual mandate helps to mitigate economic fluctuations and fosters a healthy economy.

The other options highlight roles that are not within the purview of the Federal Reserve. Fiscal policy, for instance, is determined by the government, particularly Congress and the Treasury, primarily through spending and taxation decisions. Regulating foreign trade and tariffs is the responsibility of the Department of Commerce and other governmental entities, while overseeing state and local government budgets falls to those respective governments rather than the Federal Reserve.