The Federal Reserve — commonly called the Fed — is the central bank of the United States and arguably the most powerful financial institution in the world. What the Fed does affects not just the US economy but financial conditions globally. Understanding its structure and functions is essential for understanding modern monetary economics.
The Fed was created by Congress in 1913 following a series of severe banking panics. Its structure is unique: a combination of a government-appointed Board of Governors (the Federal Reserve Board) based in Washington DC, and twelve regional Federal Reserve Banks located in major cities across the US. This unusual hybrid structure was a political compromise between centralised control and regional autonomy.
The Fed's key decision-making body is the Federal Open Market Committee (FOMC), which meets eight times per year and consists of the seven Board Governors and five of the twelve regional bank presidents (on a rotating basis). The FOMC sets the federal funds rate — the target rate at which banks lend to each other overnight — which is the primary tool of US monetary policy.
The Fed's dual mandate is set by law: maximum employment and stable prices. This differs from the European Central Bank's single mandate of price stability. The dual mandate means the Fed must explicitly consider unemployment and economic growth, not just inflation, when setting policy.
Beyond interest rates, the Fed supervises major banks, provides payment system services, manages the US dollar's role in the international financial system, and conducts research on the economy.
During crises, the Fed's role expands dramatically. In 2008-2009 and again in 2020, it extended its lending facilities far beyond normal boundaries, buying corporate bonds, supporting money market funds, and providing emergency lending to prevent financial market seizure. The phrase "don't fight the Fed" reflects the market maxim that the Fed's willingness to act as backstop makes financial collapse very difficult when it is fully engaged.