[thetwiceler]

Yes, what I described is not actually how the Federal Reserve works. I was trying to give the essence of what it does in a single sentence.

The USD is not literally backed by gold, but part of the Federal Reserve's mission is to moderate the rate of inflation; that means holding the value of the USD steady. And the way they do it is beyond the scope of this discussion, but it certainly depends on the Federal Reserve trading its holdings on the market (which, as you point out, is mainly debt (in terms of USD), not gold).

[Theodores]

You write as if the Federal Reserve is like a benevolent uncle, just doing its best for us, all of us, so we may live long and prosper!

The Federal Reserve is a privately owned entity, it has its stash of gold in New York and the actual government has its smaller stash of gold in Fort Knox.

[thetwiceler]

Think of it like this:

Let's say that Apple sees the price of its stock drop to something that it thinks is unreasonably low. They may choose to spend some of their cash on hand to buy back some of their stock. This is a wise investment that shareholders would applaud - Apple is getting a good deal.

Same deal with the Federal Reserve. Federal Reserve notes are nominally liabilities for the Fed, and are much like the concept of Apple stock. If the Fed notices the price of the dollar drops, it's in their best interest to trade some of their holdings to buy back some dollars.