The Federal Reserve – often shortened to “the Fed” – acts as the central bank of the United States. While the Fed is concerned only with the US Dollar, its monetary policies  nonetheless matter far beyond America, with its decisions rippling through global interest rates, bond yields, equity valuations, currencies, and trade.  

Why the Fed’s decision carries weight across geographic borders is due to the United States’ status as the world’s largest economy by nominal gross domestic product (GDP), and the US Dollar being the dominant reserve and invoicing currency. As such, when the Federal Reserve Board announces interest rate moves, this effectively re-prices the global “risk-free” benchmark (US Treasury yields) and the cost of dollar funding worldwide.  

As a result, whether the Fed tightens (making the Dollar more expensive) or loosens (making the Dollar loss costly), capital flows, currencies adjustments and import prices all undergo changes. This is why Fed decisions often set the rhythm of the broader global financial cycle, with spillovers felt most in open and emerging economies. 

The Federal Reserve’s actions often coincide with market price movements and volatility, which are closely followed by market participants.  

To that end, let’s take a closer look at the Fed and how it works. 

Key Points 

• The Federal Reserve System was established in 1913 to strengthen the US banking framework, regulate financial institutions, and provide stability during periods of crisis.
• Its structure consists of the Federal Reserve Board, 12 regional Reserve Banks, and the Federal Open Market Committee, which sets key US monetary policy decisions. 
• Federal Reserve policies on interest rates and liquidity have global influence, shaping capital flows, currency movements, and overall financial market conditions. 

Understanding the Federal Reserve System 

The Federal Reserve System is more than a single institution; it is a framework designed to balance national stability with regional insights. Its creation marked a turning point in US financial history, establishing a central authority to oversee banking, monetary policy, and financial services.  

By combining oversight, regulation, and policy implementation, the Fed plays a central role in maintaining stability and influencing economic activity. 

Definition  

The Federal Reserve System is the US central banking framework that carries out monetary policy, supervises banks, and provides key financial services. It was created by Congress in 1913 to provide a safer, more flexible, and more stable monetary and financial system after a series of damaging banking panics ^[1]. 

At its core, the Federal Reserve System is designed to keep inflation in the US low and employment high, safeguard financial stability, and bolster market confidence by setting and implementing monetary policy. It is responsible for setting the target range for short-term interest rates, using tools such as open-market operations and interest on reserve balances to influence borrowing costs and the pace of economic activity.  

Additionally, to protect stability in the US financial system, the Fed supervises banks, runs stress tests, and can act as lender of last resort via the discount window and, under severe circumstances, emergency lending programmes.  

To help anchor inflation expectations and sustain market confidence, the Fed adopts a high degree of transparency and independence – regular press conferences, published meeting minutes, and economic projections. This is so that households, businesses, and investors can understand the rationale behind decisions.  

Why Was the Federal Reserve Created? 

President Woodrow Wilson signed the Federal Reserve Act into law on 23 December 1913 ^[2]. The aim was to stabilise the banking system and reduce the frequency and severity of financial crises. But that goal was hammered home over many decades of tumult in US banking and finance.  

Some key financial events that spurred the creation of the Fed include:  

Panic of 1792 

One of the earliest American financial crises, the panic of 1792 was sparked off when speculation in US debt securities and bank stocks failed, triggering runs when investors could not meet obligations ^[3]. Though short-lived, this crisis highlighted the early problems of insufficient reserves, inadequate regulation, and the fragility of an interconnected finance system. 

Great Depression in 1819 

The first major nationwide depression. A speculative bubble in western lands, excessive credit expansion, and weak banking regulation led to bank failures, mass foreclosures, and a collapse in prices. Confidence in banks and the currency was severely shaken. 

Late 1800s banking panics 

A series of recurrent banking crises that took place during the “National Banking Era”. Localised and nationwide bank runs, failures, contraction of credit, sharp declines in stock prices, and repeated shocks exposed the weaknesses of a fragmented banking system without a central institution to act as backstop. 

Panic of 1907 

Perhaps the most direct catalyst for the Federal Reserve. A failed speculation (on United Copper Company), collapse in confidence in trust companies and banks, runs, and a liquidity squeeze threatened the entire financial system. J. P. Morgan and other private bankers intervened manually – pooling resources to backstop troubled institutions – in effect acting as a central bank. The panic made clear the need for a permanent institution with authority and tools to provide liquidity and stability. 

Why these events matter for the Fed’s creation 

• Frequent & Severe Bank Runs. Without a central authority, deposits were insecure; when people feared a bank might collapse, withdrawals cascaded, even if the bank was fundamentally solvent. Many panics were spread by fear as much as by actual insolvency. 
• Lack of Backstop Liquidity. Local and state banks often lacked access to emergency funds, so a local failure could spread. The Panic of 1907 especially showed how fragile the system was when liquidity dried up. 
• Inelastic Currency & Limited Monetary Control. Many earlier panics were exacerbated by rigid currency rules – banknotes pegged to gold/silver, restrictive laws on issuing banknotes, and little flexibility to expand or contract money supply in response to shocks. 
• Public Demand for Banking Reform. After 1907, there was widespread recognition among bankers, politicians, and the press that something had to change. The National Monetary Commission was established in 1908 to study problems and propose reforms. The result was the Federal Reserve Act in 1913, seeking to provide a central institution with powers to manage liquidity, supervise banks, and act before panic spread. 

How is the Fed structured? 

The Federal Reserve System comprises three main parts:  

• The Board of Governors 
• 12 regional Federal Reserve Banks, and the  
• Federal Open Market Committee (FOMC), which meets at least eight times a year to set monetary policy 

See the table below for a summary of each of these three main arms that make up the US Federal Reserve.  

Component	Who’s on it	What it does
Board of Governors (the Federal Reserve Board)	Up to seven Governors in Washington, D.C., nominated by the US President and confirmed by the Senate; 14-year staggered terms.	Oversees the System, sets certain administered rates, writes regulations, and guides policy.
12 Federal Reserve Banks	Regional banks across the US with their own boards; the New York Fed has a special role in market operations.	Operate payments, provide financial services, feed regional insights into policy, and implement FOMC decisions.
Federal Open Market Committee (FOMC)	7 Governors + New York Fed President + 4 rotating Reserve Bank Presidents (12 voters).	Sets the target range for the federal funds rate and directs open market operations. Meets ~8 times per year.

The Federal Reserve Board Explained 

The Federal Reserve Board sits at the core of the US central banking system, guiding policy decisions and supervising the wider network of Reserve Banks. Its authority ensures that monetary policy is implemented consistently while maintaining stability and confidence in the financial system. 

What is the Federal Reserve Board?  

The Federal Reserve Board (formally, the Board of Governors of the Federal Reserve System) is the System’s Washington-based governing body. It supervises the Reserve Banks and sets key rules and administered rates used to implement policy.  

Composition And Appointments 

The Board has up to seven Governors. Each is nominated by the President and confirmed by the Senate for a single 14-year term; the Chair and Vice Chairs are chosen from among the sitting Governors for four-year terms. This structure helps ensure continuity and independence over political cycles. 

What are the Federal Reserve Board’s Key Responsibilities?  

The Board oversees bank supervision and regulation, which means setting and enforcing rules that keep banks safe, stable, and compliant. This helps prevent risky behaviour that could threaten the wider financial system. 

It also sets the Interest on Reserve Balances (IORB) rate. This is the rate the Federal Reserve pays commercial banks on the reserves they keep at the Fed. By raising or lowering the IORB, the Fed can influence short-term interest rates across the economy. For example, a higher IORB encourages banks to hold on to reserves rather than lend, which tightens credit conditions. A lower IORB does the opposite, stimulating borrowing and spending. 

Another key duty is approving the discount rate, which is the interest rate charged to banks when they borrow directly from the Fed’s “discount window.” This lending facility acts as a backstop, giving banks access to emergency funds during times of stress to maintain liquidity and public confidence. 

Finally, the Board participates in the Federal Open Market Committee (FOMC), the Fed’s main monetary policy-setting body. The FOMC sets the target range for the federal funds rate, which is the benchmark interest rate for overnight loans between banks. This rate is one of the most important levers for managing inflation, employment, and overall economic growth. 

Together, these responsibilities ensure the Board plays a central role in both day-to-day banking oversight and the strategic direction of US monetary policy. 

How the Federal Reserve Works? 

The Federal Reserve works through a range of tools and objectives that shape the cost of money and credit across the economy. By adjusting interest rates, managing liquidity, and guiding expectations, it influences both domestic conditions and global financial markets. 

Policy tools 

In simple terms, the Fed influences the cost and availability of money through a set of tools: 

• Target range for the federal funds rate. Target range for the federal funds rate. The FOMC sets this benchmark range to guide the cost of overnight borrowing between banks, which then influences lending rates across the economy. The Fed keeps the actual rate within this range by adjusting the Interest on Reserve Balances (IORB) rate and the Overnight Reverse Repurchase Agreement (ON RRP) rate, which act as lower and upper boundaries for short-term market rates. This ensures that monetary policy decisions translate smoothly into broader financial conditions. 
• Open market operations. The New York Fed conducts these operations by buying or selling government securities, which adds or drains liquidity from the banking system. This is one of the most direct ways the Fed influences short-term interest rates and keeps them aligned with its policy goals. 
• Discount window. This facility allows banks to borrow directly from the Fed for short periods, using high-quality collateral like government bonds. It provides a vital safety net to prevent temporary funding shortages from turning into wider financial crises. 
• Reserve requirements. These rules once required banks to hold a certain percentage of customer deposits as reserves, ensuring stability and liquidity. Since March 2020, the requirement has been set to 0%, but the Fed retains the authority to reinstate it if economic conditions demand tighter control. 

Monetary Policy Goals  

Congress directs the Fed to pursue two main goals, known as the dual mandate: maximum employment (keeping job opportunities plentiful without overheating the economy) and stable prices (controlling inflation so the dollar maintains its purchasing power). In addition, the Fed is tasked with safeguarding financial stability, ensuring the banking system and financial markets remain resilient during shocks or crises. 

Global Impact  

Changes in US Fed interest rates and bond yields often spill over into other countries’ financial conditions, influencing exchange rates, capital flows, and borrowing costs worldwide. Evidence from the Bank for International Settlements (BIS) and the International Monetary Fund (IMF) shows these cross-border effects can be sizeable, especially for emerging markets. 

The global impact can include:  

• Currency movements. A higher US interest rate typically strengthens the US dollar, making imports cheaper for Americans but more expensive for other countries, especially those that rely on Dollar-denominated trade. 
• Capital flows. Rising US rates often attract global investors into US assets, pulling capital out of emerging markets and driving up their borrowing costs. 
• Commodity pricing. Many commodities, such as oil and gold, are priced in dollars. A stronger dollar can push commodity prices higher in local currency terms, impacting inflation abroad. 
• Global financial cycles. Changes in Fed policy can trigger risk-on or risk-off sentiment, influencing stock markets and bond yields globally, often setting the tone for other central banks’ decisions. 

These dynamics make the Fed’s actions not just a domestic concern, but a key driver of global financial stability and trade flows. 

Key Functions of the Federal Reserve 

By now, you should have a clear understanding of the importance and impact of the US Federal Reserve. To recap, here is a brief summary of the key functions of the Fed.  

• Monetary policy. The Federal Open Market Committee (FOMC) sets the overall policy stance by adjusting the target range for the federal funds rate, which is the benchmark for short-term interest rates. According to Investopedia, raising rates is one of the ways the Fed can influence inflation, potentially cooling an overheating economy and moving inflation closer to its 2% target ^[4]. Conversely, lowering rates stimulates borrowing and spending, supporting growth and employment during downturns. 
• Supervision & regulation. The Board of Governors creates and enforces rules for banks, bank holding companies, and other financial institutions. This oversight helps ensure that banks operate safely, maintain adequate capital, and manage risks responsibly. Effective regulation reduces the chance of systemic failures that could destabilise the entire financial system. 
• Financial services. The Fed plays a critical role in keeping the US financial plumbing running smoothly. It operates the nation’s key payment systems, such as Fedwire, to facilitate secure and efficient transfers between banks. The Fed also issues Federal Reserve notes (the physical US dollar bills), ensuring there is always enough cash available to meet public demand. 
• Crisis management. During times of extreme market stress (such as the Global Financial Crisis of 2008 and the COVID-19 market crash in 2020) the Fed can activate emergency powers. These allow it to lend more broadly to financial institutions, support key credit markets, and prevent widespread collapse. By acting as a lender of last resort, the Fed helps restore confidence and stabilise the economy during turbulent periods. 

Why the Federal Reserve Matters? 

The Federal Reserve’s decisions affect more than just banks and traders — they shape household budgets, guide financial markets, and uphold confidence in economic policy. Understanding these impacts helps explain why the Fed’s role is closely watched across the globe. 

For Households 

The Fed’s interest rate decisions directly shape the cost of everyday borrowing. When rates rise, loans such as credit cards, auto financing, and variable-rate mortgages become more expensive, which can reduce consumer spending. 

During rate hikes, interest offered on savings accounts may rise, while rate cuts can lower borrowing costs but reduce returns on savings products. These changes affect household budgets differently depending on individual circumstances. 

These changes directly influence household budgets, making the Fed’s decisions relevant not only to traders and economists but also to ordinary consumers. 

For Markets 

US Treasury yields, guided heavily by Fed policy, act as a global benchmark for valuing bonds, stocks, and other assets. A rate hike usually pushes Treasury yields higher, making riskier assets such as stocks less attractive, while also raising borrowing costs for businesses. 

Interest rate changes also affect currency exchange rates. Higher US rates often strengthen the Dollar, as international investors seek better returns. 

These shifts ripple across global markets, tightening or loosening financial conditions worldwide. As a result, Fed announcements are often closely watched because they can coincide with shifts in financial markets. 

For Policy Credibility 

The Fed operates independently within the US government, allowing it to set interest rates without direct political influence from the White House or Congress. At the same time, it remains accountable by reporting regularly to Congress and explaining its decisions through press conferences. 

This balance of independence and transparency helps strengthen trust among investors and the public. When people believe the Fed will act decisively to manage inflation or support growth, expectations for prices and wages remain steady. 

Such credibility is essential for maintaining market confidence and preventing disruptive swings in inflation or employment. 

Common Misconceptions About the Federal Reserve 

1. Is the Fed part of the government or independent? 

The US Federal Reserve is often described as a quasi-government entity. The Board of Governors is a federal agency, and its members are appointed by the President and confirmed by the Senate. 

However, the Fed’s monetary policy decisions are made independently of the White House and Congress. Even so, it remains accountable by reporting regularly to Congress and maintaining transparency through press conferences and published announcements. 

2. Does the Fed “print money”? 

The Bureau of Engraving and Printing, part of the US Treasury, is responsible for physically printing banknotes. The Federal Reserve issues and distributes these notes into circulation. 

When people say the Fed “prints money,” they are usually referring to electronic actions such as lowering interest rates or purchasing securities. These measures increase bank reserves and expand the money supply without physically printing more currency. 

The US Federal Reserve’s Actions and Their Implications for the Rest of the World  

It is no exaggeration to say that the Federal Reserve (and, specifically, the Federal Reserve System and the Federal Reserve Board) sits at the heart of the global financial architecture.  

In pursuing its Dual Mandate of fostering maximum employment while keeping inflation stable in the US, the country’s dominant position means that the Fed’s decisions often impact the overall global economic outlook, creating far-reaching effects around the world. 

Thus, the Fed has a leading role in shaping global financial conditions, anchored in a functional US financial system where banks operate safely, maintain adequate capital, and manage risks responsibly. This is important in reducing the chance of systemic failures that could destabilise the entire financial system – with, as clearly demonstrated in the 2008 Great Financial Crisis – serious repercussions for the rest of the world. 

Market participants often monitor Federal Reserve announcements closely, as these can coincide with periods of increased volatility. Brush up your understanding of the role of central banks in our Vantage Academy.  

Frequently Asked Questions 

1. When is the next Federal Reserve (FOMC) meeting? 

The most recent FOMC meeting took place on 16 – 17 September 2025, where the decision to cut rates by 0.25 percentage points was made.  

The next FOMC meeting is scheduled for 28 – 29 October 2025, according to the Fed’s official calendar. However, extraordinary circumstances may prompt an emergency meeting by the FOMC to address financial market stress.  

2. What does the Federal Reserve do? 

The Federal Reserve is responsible for implementing US monetary policy by adjusting the federal funds rate to influence broader financial conditions – this is carried out in pursuit of the Dual Mandate, which is given by Congress. Additionally, the Fed also supervises and regulates banks, supports financial stability, and provides payments and currency services. 

3. Who controls the US Federal Reserve? 

The US Federal Reserve is a quasi-government entity, which means there is no single owner. The Board of Governors (a federal agency) oversees the System; while the FOMC sets monetary policy; and the 12 Reserve Banks operate regionally. The System is independent within government and accountable to Congress.  

4. Who is the Chairman (Chair) of the Federal Reserve? 

As of the time of writing, the current Chair of the Federal Reserve is Jerome H. Powell. Like all Chairmen of the Fed, Powell was appointed by the US President, and will sit for a four-year term. His stint as Chairman will end in May 2026.  

Reference