There is a lot of confusion and mystery surrounding The Federal Reserve (The Fed) and the role they play with money supply and interest rate setting. At the end of the day what people need to understand is The Fed is the government entity (though not officially part of the government) that prints U.S. dollars and controls the money supply and interest rates by using one tool – the buying and selling (mostly buying) of government debt through treasury bills and bonds.
As the U.S. federal government has reached an historic size with trade deficits and national debt soaring, they are forced to consistently sell treasury bonds to the world on a monthly basis in order to cover the monthly deficit and keep the government running. In order to keep interest rates (the price of borrowing money) low, The Fed has in recent year been buying an abundance of U.S. treasuries. The Fed gets the money to buy these treasury bonds by printing the money out of thin air and thus devaluing the current currency in circulation.