The Federal Reserve uses money that doesn't really exist to purchase Treasury Securities from the US Government.
The Federal Reserve has purchased approximately $2.3 trillion of US Treasury securities in the last few years using an approach known as "quantitative easing," or QE, which lowers medium and long term interest rates and spurs economic growth (the Fed can lower short term rates by unilaterally lowering the discount rate, the rate they loan money to banks for short periods). The more buyers that exist in the Treasury securities market, the higher the price of the Treasury securities, which lowers the yields (effective interest rates) that must be paid by the government. This in turn lowers all medium and long term interest rates for other loans such as mortgages, car loans, business loans, etc. So the Fed's intervention into the Treasury market is designed to lower interest rates and spur economic growth.
In order to pay for these securities, the Federal Reserve simply wire transfers the money (which doesn't really exist) by electronically crediting the accounts of banks and investors with new money for the purchase of their bonds under the quantitative easing programs. This is not exactly the same as printing money, but pretty close, since the money does not exist before is wire transferred to the Treasury bond sellers. Obviously, only the Fed has the right to do this.
The theory is that at some later date, when the economy recovers, the Fed can sell its Treasury securities that it bought with wire transfers alone (not real money), taking the money they created out of thin air and subsequently removing it from the money supply. This will cause interest rates to rise, so they can't do that until the economy recovers, or it would just sabotage what they originally did trying to reduce medium and long term interest rates.
Ironically, the Fed is reportedly considering actually printing the money it uses for quantitative easing, instead of just electronically crediting accounts using money that does not actually exist. Then they would borrow the printed money back for short periods to take it out of the money supply. There would be no real assets behind the money that is printed for this purpose, other than the Treasury securities they buy with that money, but it doesn't actually exist beforehand. This is called 'sterilized' bond-buying, and obviously a bit complex for most of us to understand, and the Fed has not yet committed to this new method that would involve actual printing of money.
Here are some links that explain this:http://www.sharecast.com/cgi-bin/sharec ... d=19942775http://online.wsj.com/article/SB1000142 ... 82234.html
The Federal Reserve is independent from the Federal Government, although the President appoints Fed members with consent of the Senate. Although independent from the US Government, it obviously has special powers that no private institution has. The Fed has the twin objectives of maximizing employment and keeping inflation low (which usually requires some trade-offs), and using monetary policy as discussed above (and others methods) to accomplish these objectives.
No one should conclude that I have any personal opinion of the Fed's actions (or contemplated actions) one way or the other, by me posting the above information. If I have made any errors in explaining this, I welcome comments.