The Fed does not set the rate on your savings account. Your bank sets it based on funding costs, competition, and business strategy. However, bank deposit rates tend to move with overall interest rates, which are influenced by the Fed’s policy decisions and the broader economy.
The Treasury creates the phyiscal money supply (bill and coins), and has the ability to “print” money as authorized up the the Debt limit. The phsical money supply is about 11% of the overall money supply. The Fed does not per say “print” money but it does “create” money including almost 90% of the money supply. When the Fed buys securities, it pays by crediting banks’ reserve accounts, creating reserves electronically – essentially creating money and increasing money supply and this is often what is meant by “printing” money. This can lower interest rates and support credit during stress. The Fed cannot spend money on goods and services or fund government programs; only Congress and the Treasury do that through the budget process. All such actions are disclosed on the Fed’s balance sheet and in policy announcements. The public can track the size of the portfolio, the reasons for changes, and how these choices fit within the Fed’s mandate.
The Federal Reserve’s actions have definitely contributed to boom and bust cycles, often unintentionally. By lowering interest rates and pumping money into the economy during downturns, the Fed encourages borrowing and spending, which can inflate asset bubbles. Later, when it raises rates to control inflation, these bubbles can burst, causing recessions. This cycle of easy money fueling booms and tightening leading to busts has repeated many times, including the dot-com bubble, the 2008 housing crisis, and the recent inflation surge following pandemic-era stimulus.
While the Fed’s goal is to smooth out economic fluctuations and maintain stability, its tools sometimes amplify volatility instead. Economic cycles are also influenced by global events, technological changes, and private sector actions outside the Fed’s control. So, while the Fed plays a powerful role in shaping cycles, it is not the sole cause, and policy mistakes or unintended consequences have sometimes made busts deeper or booms less sustainable. Understanding this complex role helps explain why calls for reform and better accountability continue.
Policy is set by the FOMC, a committee that debates the economic outlook and votes on actions. The Chair leads the discussion and communicates the decision, but each voting member casts an individual vote. Statements list the votes and any dissents, and minutes provide a fuller summary of the range of views. This committee process is designed to bring diverse perspectives from across the country into each decision.
You can submit public comments on proposed rules, contact your regional Federal Reserve Bank, write to the Board of Governors, or express your concerns to your local congressional representative. The Chair and other officials regularly testify before Congress, where elected representatives raise constituent concerns. The Fed also hosts listening sessions, advisory councils, and outreach events. Comment portals and contact information are posted online so residents can participate directly.
Banks hold reserve accounts at the Fed to settle payments and meet liquidity needs. Each day they send and receive funds through Fedwire and other services, manage cash, and, when needed, may borrow at the discount window. These services help the financial system operate smoothly. The Fed publishes rules, fees, and volumes for payment services, and provides details about the discount window’s terms and collateral.
Historically, the Fed’s actions have had a signficant impact on markets. The Fed’s policy affects interest rates and financial conditions, which influence corporate borrowing costs, market valuations, and investor sentiment. Easier policy often lowers discount rates and that in turn can support asset prices; tighter policy tends to do the opposite as markets adjust to higher financing costs lowering valuations. While the Fed watches overall financial stability, it does not focus on the stock market. The Fed is focused on its dual mandate of Employement and Price Stability. However, as an investor you should understand how the Fed’s policies can impact the market as they can have significant effects.
Quantitative easing (QE) is when the Fed buys Treasury and agency securities to support smooth market functioning and lower longer-term borrowing costs; quantitative tightening (QT) is the reverse, allowing holdings to mature or be sold to reduce the balance sheet and increasing borrowing costs. These actions change the amount of bank reserves in the financial system and influence interest rates beyond the overnight rate. QE and QT are conducted through the New York Fed’s open-market operations and are reported in detail. The size and composition of the Fed’s assets and liabilities are published weekly so the public can see how policy choices affect reserves and broader financial conditions.
On decision days, the Fed posts a policy statement and holds a press conference with the Chair. The statement, vote, and policy rate target are released at a set time, and supporting materials, like the economic projections, are posted on the same page. Anyone can follow along live and read the materials immediately after. The Fed also provides minutes, speeches, and the semiannual Monetary Policy Report to Congress for a fuller picture.
The Fed’s balance sheet shows the securities it holds and the reserves it creates, along with liabilities like currency in circulation. When the Fed buys securities, its assets and bank reserves rise; when it allows holdings to mature or sells them, the balance sheet shrinks. The weekly H.4.1 release provides a transparent, line-by-line accounting so the public can monitor the size and composition of the portfolio and how it changes with policy.
The Fed sets a target interest rate known as the Federal funds rate, the rate banks charge each other for overnight lending. When the Fed raises rates, borrowing generally becomes more expensive across the economy; when it lowers rates borrowing tends to become cheaper. Bank (Lenders) adjust their rates according to the Fed Funds rate for mortgages, car loans, and credit cards based on funding costs, competition, and your credit profile. The Fed does not set your specific loan rate, but its decisions influence the overall level of interest rates in the market. Adjustable-rate interest products often move sooner, while fixed-rate mortgages reflect broader bond-market yields that also respond to Fed actions and inflation expectations based on the risk and maturity of the product.
The Fed aims for price stability and maximum employment over time, not perfect control month to month. By keeping inflation low and predictable on average, the Fed seeks to foster a stable environment where families and businesses can plan, save, and invest with fewer surprises. For households, this means designing a plan that can handle normal rate cycles, making Financial decisions based on sound planning and not overt actions due to Fed policies and over-reliance on short-term forecasts. However, managing employment and infaltion is tricky and the Fed does not always achieve its aims. Households should be aware of the mechanics of the Fed and how they can impact financial markets. The Fed’s strategy statement explains how it evaluates inflation and the labor market when making decisions.
Interest-rate changes can influence global capital flows and exchange rates. Higher U.S. rates often strengthen the dollar by attracting investment; lower rates can have the reverse effect. These movements affect import prices, trade, and financial conditions worldwide and Central banks around the world react to these changes. While the Treasury sets U.S. exchange-rate policy, the Fed’s monetary policy indirectly influences currency values. Official dollar indexes and foreign-exchange rates are published so the public can track changes over time.
The Fed is independent in its policy decisions so it can focus on long-term economic goals, not short-term politics. Fed Governors are appointed by the President and confirmed by the Senate for long terms; the Fed independently funds itself through its operations rather than annual appropriations. Independence comes with accountability: the Fed Chair testifies before Congress, the Fed publishes minutes, forecasts, and audits, and financial statements are reviewed by external auditors. Their actions are not without scrutiny or oversight. Congress sets the goals (“dual mandate”) and can amend the Federal Reserve Act.
The Federal Reserve regulates banks and uses reserve requirements to ensure the safety and stability of the financial system. The reserve requirement is the minimum amount (expressed as a ratio) that banks are required to hold of certain deposits. However, since March 2020 the Fed has set the reserve requirement ratios to zero percent, and it now relies on other tools like the interest rate paid on reserve balances and open-market operations to guide short-term rates and credit conditions. Even without formal requirements, banks hold balances at the Fed for payments and liquidity. The Fed’s current toolset is published and updated so the public can track how policy is implemented.
The Fed is accountable to Congress and the public. It publishes decisions, minutes, and financial statements; the Chair testifies twice a year, and the Government Accountability Office and the Fed’s Inspector General conduct audits and reviews (with certain limits around active policy deliberations). Independent outside auditors review the System’s financial statements annually, and the Fed provides detailed information about its operations, balance sheet, and emergency lending, when applicable. The Feds actions and policies are highly scrutinized by Bankers, Economists, and Policy Analysts with a wide array of feedback mechanisms.
Central banks maintain price stability, support employment, supervise banks, and operate core payment systems. In crises, they can act as lender of last resort to prevent system-wide failures. The U.S. Federal Reserve serves these roles for the United States under the Federal Reserve Act, with responsibilities and decision processes published for public review.
A central bank is a public authority that issues a nation’s currency, guides interest rates, and helps keep the financial system safe and reliable. By fostering price stability and a sound payments network, it provides a stable foundation for saving, investing, and commerce. Most countries maintain central banks because stable money and payments are public goods. International organizations and national central banks publish materials that explain these roles and why independence and transparency matter.
Congress directs the Fed to pursue maximum employment and stable prices (inflation), with moderate long-term interest rates as a by-product of those goals. These objectives are known as the “dual mandate.” The Fed explains how it interprets these goals in its strategy statement, including the reasoning for focusing on inflation that averages 2 percent over time and labor-market conditions consistent with sustainable growth.
The Federal funds rate is the overnight interest rate banks charge one another for reserves; it is targeted by the Fed to guide overall financial conditions. The prime rate is a benchmark many banks use when pricing certain loans to their best customers. The prime rate is set by banks, not by the Fed, and typically moves in the same direction as the federal funds rate and is generally considered the Fed funds rate plus a spread. Your actual loan rate depends on the product and your credit, not simply the prime rate itself.
The Federal Reserve’s mission is set by Congress and it is to promote stable prices and maximum employment known as the dual mandate. It does this mainly through Monetary policy through interest rates, open market operations managing bond liquidity, bank supervision, and keeping the nation’s payment systems running safely. The Fed is a public institution within the U.S. government, created by the Federal Reserve Act. It is designed to be operationally independent when making policy, but accountable to the public and Congress through reports, testimony, audits, and published decisions.
The Fed maintains twelve regional Federal Reserve Banks that carry out many of the System’s day-to-day functions: supervising banks, operating payment services, conducting research, and engaging with local communities. The regional Fed presidents participate in FOMC meetings and vote on a rotating basis. The Board of Governors in Washington D.C. provides national oversight, writes regulations, and chairs the FOMC. Together, the Board and the Banks make up the Federal Reserve System created by Congress.
This is understandable as when the Fed speaks it can have a significant impact on markets. Because of this the Fed uses language more attuned to Investment bankers and Economists than the lay person. Fortunately, the Federal Reserve publishes plain-language guides, statements, and videos that explain how it sets interest rates, why price stability matters, and how decisions are made. The “Monetary Policy” pages include the policy framework, meeting materials, and educational resources. For context at a glance, read the FOMC’s “Statement on Longer-Run Goals and Monetary Policy Strategy,” which summarizes what the Fed is trying to achieve and the indicators it watches.
The Fed releases meeting minutes about three weeks after each FOMC meeting, summarizing the discussion and the range of views. These minutes help readers understand the reasoning behind each decision. Full transcripts and meeting materials are published with a five-year lag. The public can browse calendars, statements, minutes, projections, and historical records in one place.
The U.S. Treasury pays for government spending by collecting tax income, fees, and other revenues. When these sources aren’t enough to cover all spending that Congress has approved, the Treasury issues new debt (Treasury bills, notes, and bonds) that are sold to investors, banks, and even foreign governments. The money raised from these auctions is deposited into the Treasury’s account at the Federal Reserve and then used to fund public programs, payments, and services.
The Treasury does not simply “create” money out of thin air; it can only spend what is authorized by law and funded through tax revenues or selling debt. The debt ceiling is the legal limit set by Congress on how much total debt the Treasury can issue. Once this ceiling is reached, the Treasury cannot borrow more to pay bills unless Congress votes to raise or suspend the limit, which temporarily caps how much funding can be raised beyond incoming revenue.
The U.S. Treasury controls the physical currency (bills and coins) that make up about 11% of the M2 money supply. This currency is literally printed and minted by the Treasury and distributed through the banking system for everyday public use. However, this is just a small part of the total money in the economy.
The Federal Reserve controls most of the money supply by managing bank reserves and conducting open market operations, mainly buying and selling government securities. When the Fed buys these securities, it creates electronic credits that increase banks’ reserve balances, enabling banks to lend more and expand the broader money supply (like checking and savings deposits), which make up the majority of M2 (Almost 90%). So, while the Treasury issues physical cash, the Fed primarily controls the creation and regulation of money through its influence on banking reserves and credit.
The FOMC consists of the seven members of the Board of Governors in Washington D.C., the president of the Federal Reserve Bank of New York, and four of the remaining Reserve Bank presidents who serve one-year terms on a rotating basis. All Reserve Bank presidents attend and contribute; only some vote at each meeting. Members bring significant experience in economics, finance, banking, and public service along with educational attainment. Biographies of current Governors and Reserve Bank presidents, including education and previous roles, are posted and updated publicly.
