Federal Reserve System (The Fed)

The Federal Reserve System, usually called the Fed, is the central bank of the United States. It sets the country's short-term interest rates, supervises many banks, runs core payment systems and acts as lender of last resort when credit markets seize up. Its decisions move borrowing costs for households, firms and the US government, and because the US dollar is the main global reserve currency, they ripple through every other economy.

The Fed is not a single bank. It combines a federal agency, the Board of Governors in Washington, D.C., with twelve regional Federal Reserve Banks and a policy body, the Federal Open Market Committee (FOMC). It is one of the world's central banks with the widest reach, alongside the European Central Bank (ECB) and the Bank of England, whose Bank Rate plays the same role in the UK. This entry covers the whole system; the Federal Reserve Board entry describes the Board itself.

Think of the Fed as the bank that ordinary banks use. Banks keep accounts there, settle payments with each other through it, and can borrow from it when they are short of cash. Because it is the only body that can create the dollars held in those accounts, the price it charges and pays for that money becomes the anchor for all other dollar borrowing.

When the Fed wants the economy to cool down, it makes money more expensive, a bit like a toll operator raising the price at the bridge so fewer cars cross. When it wants activity to pick up, it lowers the toll. It also steps in as a backstop when frightened lenders stop lending to each other.

Congress created the Fed through the Federal Reserve Act, signed by President Woodrow Wilson on 23 December 1913, after a series of banking panics, above all the Panic of 1907, showed that the country had no reliable source of emergency liquidity. The early Fed was criticised for letting the money stock collapse during the Great Depression, and the Banking Act of 1935 centralised power in the Board and gave the FOMC its modern form. The Treasury-Fed Accord (1951) ended the wartime promise to cap Treasury yields and restored the Fed's freedom to set rates.

In 1977 Congress gave the Fed what is now called its dual mandate: maximum employment and stable prices, alongside moderate long-term interest rates. Under Paul Volcker in 1979–1982 it pushed rates to record highs to break double-digit inflation. During the 2008 Financial Crisis it cut the federal funds rate to near zero, lent to banks and non-banks, and began large-scale asset purchases known as quantitative easing. It did so again in 2020. Kevin Warsh was sworn in as Chair on 22 May 2026, succeeding Jerome Powell.

• The Board of Governors. Seven governors are nominated by the President and confirmed by the Senate for staggered 14-year terms; the Chair and Vice Chairs serve four-year terms in those roles.
• The twelve Reserve Banks. Based in cities from Boston to San Francisco, they are legally owned by member commercial banks but operate under Board oversight, supervise banks in their districts and provide payment services.
• The FOMC. It has twelve voting members: the seven governors, the president of the New York Fed and four of the other eleven Reserve Bank presidents on a yearly rotation. It meets eight times a year.

Fed decisions do not need approval from the President or Congress, but the Fed reports to Congress twice a year and its leaders testify regularly. This arrangement is usually described as independence within government.

The FOMC sets a target range for the federal funds rate, the rate at which banks lend reserves to each other overnight. Since 2008 the Fed has operated with abundant reserves, so it steers market rates mainly through administered rates rather than daily trading: interest on reserve balances (IORB), the overnight reverse repo facility, the standing repo facility and the discount window. At its 28 October 2026 meeting the FOMC held the target range at 3.75–4.00%, after raising it a quarter point in September 2026, and set IORB at 3.90%.

The Fed also manages the size of its balance sheet. It ran down its bond holdings through quantitative tightening from mid-2022 until 1 December 2025, then began buying Treasury bills to keep reserves ample. Wider tools of monetary policy include open market operations, forward guidance and emergency lending under Section 13(3) of the Federal Reserve Act.

The Reserve Banks operate Fedwire, the US real-time gross settlement system, FedACH and, since 2023, the FedNow instant payment service. The Fed supervises bank holding companies, state-chartered member banks and, after the Dodd-Frank Act, the largest financial firms. Through central bank swap lines it supplies dollars to other central banks during periods of stress, which makes it the de facto global source of dollar liquidity.

Critics on the left argue that low rates and asset purchases mainly lifted the prices of assets held by the wealthy, while critics on the right argue that the Fed has strayed beyond its mandate and that its large balance sheet distorts markets. Some economists blame the Fed for responding too slowly to the 2021–2022 inflation surge. Others, including advocates of Modern Monetary Theory and of rules-based policy such as the Taylor rule, dispute how much discretion it should have. Its independence has been a recurring political issue, including public pressure from the White House over rate decisions in 2025 and 2026.

• Board of Governors of the Federal Reserve System: About the Fed
• Federal Open Market Committee