What Is the Federal Reserve? Explained for Kids

The Federal Reserve controls how much money exists in the United States. Your kid has probably never heard of it, but it affects their life every single day. Here's the version that makes sense without a finance degree.

The Federal Reserve (commonly called “the Fed”) is the central bank of the United States. Created by Congress in 1913,¹ it controls the money supply, sets interest rates, and acts as a bank for banks. The President appoints its leaders, but the Fed operates independently from the government.

What does the Federal Reserve do?

The Fed has a few big jobs. First, it controls the money supply: how many dollars exist in the system. Second, it sets interest rates (called the federal funds rate),² which is basically the price of borrowing money. When the Fed lowers interest rates, borrowing gets cheaper, so people buy more houses, cars, and stuff. When it raises rates, borrowing gets expensive and people pull back.

Third, the Fed acts as a bank for banks. Regular banks keep accounts at the Fed, kind of like you keep an account at your bank.

Why was the Federal Reserve created?

The Federal Reserve was created in 1913 after a string of bank panics. In 1907, a massive financial crisis nearly collapsed the entire banking system.³ J.P. Morgan (the person, not the company) had to personally step in and use his own money to stop the bleeding. Congress decided they needed a system that could prevent that from happening again. So they passed the Federal Reserve Act on December 23, 1913.¹

Here's the thing most people don't realize: since the Fed was created in 1913, the dollar has lost over 96% of its purchasing power. A dollar in 1913 bought what you'd need about $31 to buy today.⁴ Whether the Fed has been good or bad overall is a genuine debate, but that number is real.

Who controls the Federal Reserve?

The Fed is weird. The President appoints the Fed Chair (currently Jerome Powell, first appointed in 2018⁵), but the Fed operates independently. The government can't tell the Fed what to do with interest rates. In theory. In practice, Presidents pressure the Fed constantly, but the Fed can say no. It's set up this way to keep politics out of money decisions. Whether it actually works that way is another story.

The Federal Open Market Committee (FOMC) meets 8 times a year to set interest rates and decide monetary policy.⁶ Twelve people sit on that committee. Their decisions ripple through every mortgage, car loan, credit card, and savings account in the country.

Why do some people criticize the Federal Reserve?

Critics point out that the Fed has created trillions of dollars since 2008. In March 2020, the Fed created over $3 trillion in a few months to keep the economy from collapsing during COVID.⁷ That money didn't come from taxes or savings. It was created from nothing. The result: inflation hit 9.1% in 2022,⁸ and groceries, rent, and gas prices jumped.

Other people argue the Fed prevented something worse: a full economic collapse, mass unemployment, bank failures. Both of these things can be true at the same time.

How does Bitcoin work without a Federal Reserve?

Bitcoin was designed to operate without a central bank. There's no board of governors, no chair, no one who decides how much Bitcoin to create. The rules were set in 2009 and can't be changed: 21 million, released on a predictable schedule, controlled by math instead of meetings.⁹ Some people find that reassuring. Others think an economy needs a Fed that can adjust. Both sides have points. For a full comparison, see our guide on Bitcoin vs. the dollar.

How to explain the Federal Reserve to kids (parent talking points)

• “Who's in charge of money?” In the U.S., it's the Federal Reserve. A small group of people decides how much money exists and how much it costs to borrow. They meet 8 times a year to make those decisions.
• “Can they just make more money whenever they want?” Basically, yes. And they do. The question is whether they create the right amount at the right time. Sometimes they get it right. Sometimes they don't, and we get inflation.
• “Does Bitcoin have a Federal Reserve?” Nope. That's one of the main differences. Bitcoin runs on rules baked into the code, not on decisions made by a committee. Nobody can change the supply. Our explainer on what Bitcoin is covers how it works.

Try this at home

The class treasurer simulation (15 minutes, ages 10+). Make your kid the “Fed Chair” of the family for a week. Give them a jar of tokens (the money supply). They decide how many tokens to hand out and set the “interest rate” (how many tokens someone has to pay back if they borrow). Let the family buy and sell chores, snacks, or screen time. At the end of the week, ask: “Did you create too many tokens? Too few? How did you decide?”

Materials: A jar of tokens, a notebook to track transactions. Time: 15 minutes setup, runs all week.

Sources

1. Federal Reserve History, “Federal Reserve Act Signed by President Wilson” (Dec 1913)
2. Federal Reserve, Federal Funds Rate
3. Federal Reserve History, “The Panic of 1907”
4. U.S. Bureau of Labor Statistics, CPI Inflation Calculator (1913 to present)
5. Federal Reserve, Jerome H. Powell, Chair
6. Federal Reserve, FOMC Meeting Calendar
7. Federal Reserve Bank of St. Louis, Federal Reserve Total Assets (FRED)
8. U.S. Bureau of Labor Statistics, CPI Report, June 2022 (9.1% year-over-year)
9. Nakamoto, Satoshi. Bitcoin: A Peer-to-Peer Electronic Cash System (2008)