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By serving as an intermediary bank, setting reserve requirements, and making short-term loans to banks, the Fed plays a crucial role in overseeing the nation's banks and money supply. Our checks (a huge part of our money supply) are efficiently processed, banks are prevented from lending more of our money than is safe, and banks are provided assistance in meeting the federal regulations that ensure a stable and safe financial system. But the Fed also uses some of these same tools to more generally influence the performance of the economy. By adjusting the discount rate and reserve requirement, the Fed can make adjustments in the nation's money supply during periods of recession and inflation. http://www.shmoop.com/money-banking/monetary-policy.html