How does the Federal Reserve maintain the stability of the financial system?
The Federal Reserve’s roles in conducting monetary policy, supervising banks, and providing payment services to depository institutions help it maintain the stability of the financial system. Using the monetary policy tools at its disposal, the Federal Reserve can promote an environment of price stability and reasonably damped fluctuations in overall economic activity that helps foster the health and stability of financial institutions and markets. The Federal Reserve also helps foster financial stability through the supervision and regulation of several types of banking organizations to ensure their safety and soundness. In addition, the Federal Reserve operates certain key payment mechanisms and oversees the operation of the payment system more generally, with the goal of strengthening and stabilizing the system. The Federal Reserve engages in all these activities on a routine basis, but the stabilization activities of a central bank are especially evident and critical during periods
