IntroductionThe Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act. The Federal Reserve System was established with the main objectives of setting nation’s monetary policy, supervising and regulating banking institutions, maintaining the stability of the financial system and providing financial services to depository institutions, the U.S. government and foreign official institutions.The Federal Reserve is the most powerful central bank in the world as it regulates the largest economy of the world and its decisions and policies have worldwide impact. Functions of Federal Reserve SystemFederal Reserve System performs following key functions.1. Managing Inflation: The Federal Reserve controls inflation by managing credit, the largest component of the money supply. The Fed restricts credit by raising interest rates and making credit more expensive. That reduces the money supply, which curbs inflation. When there is no risk of inflation, the Fed makes credit cheap by lowering interest rates. This increases liquidity and spurs business growth. That ultimately reduces unemployment.2. Supervising Banking System: The Federal Reserve oversees roughly 5,000 bank holding companies, 850 state bank members of the Federal Reserve Banking System and any foreign banks operating in the United States. The Federal Reserve Banking System is a network of 12 Federal Reserve banks that both supervise and serve as banks for all the commercial banks in their region. The Federal Reserve sets the reserve requirement for the nation’s banks i.e. percentage of money bank should hold under it which cannot be lent.3. Providing banking services: The Federal Reserve provides banking services to the US government and depository institutions like savings banks, savings and loan associations and credit unions. The Reserve Banks provide the U.S. Treasury with a checking account, and when the government pays for something, the payment is typically cashed by or deposited in a commercial bank. The Fed processes the payment and deducts the amount from the Treasury’s account.4. Protecting Consumer interests: The Fed helps ensure that the financial institutions it supervises comply with the laws that protect consumers. These laws govern consumer credit to help ensure that banks and other financial institutions are acting in the public’s best interest. StructureStructure of Federal Reserve System is often described as “Free within government”The System does not require public funding, and derives its authority and purpose from the Federal Reserve Act, which was passed by Congress in 1913.The four key component of federal system are as follows: 1. Board of Governors: The seven-member Board of Governors is a federal agency. It is charged with the overseeing of the 12 District Reserve Banks and setting national monetary policy. It also supervises and regulates the U.S. banking system in general. Governors are appointed by the President of the United States and confirmed by the Senate2. Federal Open Market Committee: The Federal Open Market Committee (FOMC) consists of 12 members, seven from the Board of Governors and 5 of the regional Federal Reserve Bank presidents. The FOMC oversees and sets policy on open market operations. These operations affect the amount of Federal Reserve balances available to depository institutions, thereby influencing overall monetary and credit conditions. The FOMC also directs operations undertaken by the Federal Reserve in foreign exchange markets.3. Federal Reserve Banks: There are 12 regional Federal Reserve Banks which serve as the operating arms of the system. Each Federal Reserve Bank has a board of directors, whose members work closely with their Reserve Bank president to provide grassroots economic information and input on management and monetary policy decisions.4. Member Banks: Each member bank is a private bank that holds stock in one of the twelve regional Federal Reserve banks. The amount of stock each member bank must buy is set to be equal to 3% of its combined capital and surplus of stock in the Reserve Bank within its region of the Federal Reserve System. CriticismThe Federal Reserve System has faced various criticisms since its inception in 1913. Criticisms include transparency, doubt of efficacy due to what is seen by some as poor historical performance and traditionalist concerns about the debasement of the value of the dollar. Federal Open Market Committee which is part of the Federal Reserve System is often criticized for lacking transparency and not being sufficiently audited.Federal Reserve System is often held responsible for Global financial crisis of 2007-08. It is pointed out by critiques that the Federal Reserve kept interest rates too low following the 2001 recession which caused the United States Housing bubble which led to credit crunch. ConclusionGoing by the historical data and researches it is often discovered that higher the independence of the central banking system in the country, lower are the rates of inflation. The generally agreed upon reason independence leads to lower inflation is that politicians have a tendency to create too much money if given the opportunity to do it, thus an independent central banking system is needed to keep the economy in check and prevent it from crashing. The Federal Reserve System in the United States is generally regarded as one of the more independent central banks hence it plays important role in US economy by managing inflation and stabilizing economy.