Federal ReserveFed
The Federal Reserve (the Fed) is the central bank of the United States; its interest-rate decisions affect markets around the world.
Because the US dollar is at the centre of global finance, decisions by the Federal Reserve ripple far beyond the United States. Its target for the federal funds rate influences mortgage rates, bond yields, the dollar, stock valuations and borrowing costs worldwide. This entry explains how the Fed is organised, what it aims for, how it communicates, and how traders follow it.
- Category
- Fundamentals and Macroeconomics
- Reading time
- 4 min
- Also called
- US central bank, Fed funds rate, The Fed
- Updated
The Fed in plain words
The Fed is the US central bank. Its main policy committee sets a target range for the federal funds rate — the rate banks charge each other for overnight loans.1 See Central Bank and Federal Open Market Committee.
The Fed has two main goals set by law: stable prices and maximum employment.2 When inflation is high, it tends to raise rates; when the economy weakens, it tends to cut. See Inflation.
How traders follow the Fed, step by step
Mark FOMC meetings
Eight scheduled meetings a year, plus unscheduled ones in emergencies.
Check market expectations
Fed funds futures show what is priced in.
Read the statement
Compare the wording with the previous one.
Watch the projections
At some meetings, officials publish projections for rates and the economy.3
Follow the press conference
The chair’s answers can move markets sharply.
Track key data
Inflation and jobs reports drive Fed expectations. See Consumer Price Index and Nonfarm Payrolls.
Worked examples
Example 1 — Dollar on a hawkish Fed
HawkishThe Fed signals rates will stay higher for longer than markets expected.
| US dollar | Strengthens |
| Treasury yields | Rise |
| Growth stocks | Often fall |
A change in the expected path of rates moves many markets at once.
Example 2 — Global spillover
GlobalHigher US rates draw capital into dollar assets.
| Other currencies | Often weaken vs. USD |
Fed decisions affect borrowing costs and currencies around the world.
Example 3 — Decision-day whipsaw
WhipsawA stock index jumps 1% on the statement, then falls 1.5% during the press conference.
| Range | 2.5% in an hour |
First reactions often reverse. Many traders wait or reduce size.
The Fed’s main tools
| Aspect | What it does | Market effect |
|---|---|---|
| Fed funds target | Sets the overnight rate range | Short-term rates, dollar |
| Balance sheet | Buys or runs off bonds | Longer-term yields. See Quantitative Easing and Tightening |
| Forward guidance | Signals future policy | Rate expectations |
| Lending facilities | Provides liquidity in stress | Calms funding markets |
Why the Fed matters
Global benchmark
The dollar is used worldwide in trade and finance.
Bond markets
Treasury yields respond to Fed expectations. See Treasury Bills, Notes and Bonds.
Currency trading
Dollar pairs react to every decision.
Risk appetite
Easier policy often supports riskier assets.
Advantages and disadvantages
Advantages
- Transparent schedule and published statements.
- Expectations are visible in futures markets.
- Policy direction usually changes gradually.
Disadvantages
- Reactions depend on subtle wording.
- Decision days are volatile.
- Data surprises can quickly change expectations.
- Effects on the economy are slow and uncertain.
Going deeper
Read as far as you need. Each level builds on the one before it.
The dual mandate
Beginner
The Fed aims for maximum employment and stable prices. These goals can conflict when inflation is high and unemployment is rising.
Structure
Intermediate
The Fed consists of a Board of Governors in Washington and twelve regional Reserve Banks. Rate decisions are made by the Federal Open Market Committee.
Projections are not promises
Advanced
Officials’ rate projections show their views at that moment. They change with the data, and markets often disagree with them.
Common mistakes
Reacting to the first move
Statement and press conference can disagree.
Ignoring what is priced in
Check futures before the decision.
Forgetting global effects
Fed moves affect non-US assets too.
Treating projections as certain
They change with data.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- The Fed is the US central bank.
- The FOMC sets the federal funds target range.
- Its goals are maximum employment and stable prices.
- Its decisions move markets worldwide.
- Watch statements, projections and press conferences, not just the decision.
Frequently asked questions
Why do markets watch the Fed so closely?
What is the federal funds rate?
Who decides US interest rates?
Further learning
- Central Bank
How central banks work in general.
- Interest Rate
How rate changes move markets.
- Inflation
The Fed’s main concern.
- Economic Calendar
Where Fed dates are listed.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Federal Reserve Board. Federal Open Market Committee (opens in a new tab) Checked .
- Federal Reserve Board. What economic goals does the Federal Reserve seek to achieve through its monetary policy? (opens in a new tab) Checked .
- Federal Reserve Board. Meeting calendars and information (FOMC) (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.