Sets Interest Rates
Fed decisions affect borrowing costs for mortgages, credit cards, auto loans and business loans across the economy.
In plain English
The Fed is the nation's central bank, and one of its main jobs is to keep prices stable by raising or lowering interest rates.
Simple example
To combat the 2022 inflation surge, the Federal Reserve raised its benchmark interest rate from near zero to over 5% between March 2022 and July 2023.
Why it matters
What the term actually changes.
Targets Inflation
The Fed aims for about 2% annual inflation, a benchmark it views as consistent with stable prices and steady growth.
Impacts Jobs
Raising rates to cool inflation can slow hiring and growth, while cutting rates can boost employment but risk higher prices.
How it works
The mechanics, in practice.
Federal Funds Rate
The Fed's policy committee sets a target range for the rate banks charge each other overnight, which ripples through other interest rates.
Dual Mandate
Congress directs the Fed to pursue both price stability and maximum employment, a balance that can require trade-offs.
Independent Decisions
Fed governors serve staggered terms to insulate monetary policy from short-term political pressure, though the president nominates them.