How the Fed actually works
It sets one interest rate and talks. Almost everything else you hear attributed to it is a consequence of those two things.
The Federal Reserve is the central bank of the United States. Its monetary policy decisions are made by the Federal Open Market Committee, which meets on a published schedule.
The mandate
Congress gave it two objectives: maximum employment and stable prices. Two goals, one instrument — which is the entire source of its difficulty. When inflation is high and employment is weak, the correct action for one objective is the wrong action for the other.
What it actually sets
The federal funds rate is what banks charge each other to borrow overnight. The Committee announces a target range and uses its tools to keep the market rate inside it. Everything else — mortgages, credit cards, corporate bonds — moves in response, not by decree.
How that reaches you
- Short-term borrowing and saving. Fast. Rates on cash and variable-rate debt follow within weeks.
- Expectations of future short rates. Immediate, and priced into longer bonds the moment the market changes its mind.
- Spending and hiring decisions. Slow. A rate change takes many months to alter what companies and households actually do.
That last lag is the hardest part of the job. Policy set today affects an economy that does not yet exist, which means the Committee is always acting on a forecast.
Why the words matter as much as the decision
By the time a decision is announced, markets have usually priced it. What they have not priced is how the Committee describes conditions. The adjectives attached to inflation and employment in the statement are the part that moves prices.
The Committee prefers consensus, so a public dissent means a member thought the disagreement worth recording. A unanimous vote and a split vote on the same decision describe two different institutions.