What does the Federal Reserve actually do?

The Federal Reserve is the central bank of the United States, created in 1913, and Congress gave it a dual mandate: to pursue maximum employment and stable prices. Its primary tool is monetary policy, principally setting a target for the federal funds rate, the rate banks charge each other overnight, which propagates through the financial system into mortgage rates, credit card APRs, business borrowing costs, and savings account yields. Raising rates cools borrowing and spending to fight inflation; cutting them encourages activity when the economy weakens. The Fed also supervises and regulates many banks, operates core payment infrastructure, and acts as lender of last resort during financial crises, which is the role that dominated 2008 and March 2020.

Its structure is deliberately unusual: a Board of Governors in Washington whose members are presidentially appointed and Senate-confirmed to long staggered terms, plus twelve regional reserve banks, with policy set by the Federal Open Market Committee. That design aims at independence from short-term political pressure, on the theory, supported by substantial cross-country evidence, that central banks subject to electoral incentives tend to produce higher inflation. The independence is real but bounded, since Congress created the Fed and could restructure it. This is also why Fed decisions draw such intense attention and criticism from across the political spectrum, and why the chair's language at press conferences moves markets more than almost any other regularly scheduled event.