What is the Federal Reserve?
Updated on August 24, 2026 · by Alex
The Federal Reserve, or Fed, is the central bank of the United States. Its job is to keep prices stable and employment high, and to that end it sets the benchmark interest rate and regulates the banking system. Because the dollar is the world reference currency, its decisions affect markets everywhere.
It has a dual mandate written into law, which is unusual among central banks: it must pursue both stable prices — inflation around 2% a year — and maximum sustainable employment. Most central banks in the world only have the first.
The two objectives usually pull in opposite directions, and that is the whole tension of the job. Bringing inflation down means cooling the economy, which destroys jobs. Protecting employment means keeping money cheap, which feeds inflation. Every decision is a choice between those two costs.
Its main tools are the Fed funds rate and the size of its balance sheet: buying or selling bonds to inject or withdraw money from the system. It also supervises banks, and decides whether a bank in trouble gets liquidity.
Because the dollar is the currency much of the world's debt is issued in and much of global trade is invoiced in. When the Fed raises rates, the dollar tends to strengthen against other currencies — that is what the dollar index measures — and dollar debt owed by any country or company gets more expensive to service in local currency.
For someone investing in American stocks from abroad, this cuts both ways: the Fed moves the price of your shares and also the value of your currency against the dollar those shares are denominated in.
Reading it as if it were one person. The Fed chair is the public face, but decisions are made by a committee of twelve voters that is often split, and each member publishes their own projection. The minutes, released three weeks later, show that disagreement and often move markets as much as the original decision.
The other mistake is treating its projections as promises. The dot plot of expected rates is a snapshot of what committee members think today with today's data. It is not a commitment, and it has been revised sharply more than once.
