What the Fed Actually Is
The Federal Reserve System is the central bank of the United States. It was created in 1913 in response to a series of banking panics and today comprises the Board of Governors in Washington, twelve regional Reserve Banks, and the Federal Open Market Committee (FOMC), which sets policy.
The Fed is technically independent of the executive branch, though its chair is appointed by the president and confirmed by the Senate. That structure is designed to insulate monetary policy from short-term political pressure — an arrangement that most economists argue is essential for credibility.
The Dual Mandate
Congress has given the Fed two objectives: maximum sustainable employment, and price stability defined as roughly 2% annual inflation on average. Every rate decision is framed around these two goals, though at any given moment one is usually dominant.
When inflation is high, the Fed tightens — even at the cost of unemployment. When growth is weak, it loosens. The last three years have been an unusually clean example of the first pattern in action.
How the FOMC Sets Rates
The FOMC meets eight times a year to decide the target range for the federal funds rate — the rate banks charge each other for overnight lending. That single number cascades into every mortgage rate, corporate bond yield, credit-card APR and savings-account rate in the United States.
Each meeting is followed by a statement, a press conference and — quarterly — the release of the “dot plot” showing individual members’ rate projections. Markets scrutinise every word for signals about the future path, not just the current decision.
