When Federal Reserve Chairman Jerome Powell announces the bank's interest rate decision on Wednesday, he will be carrying out one of the Federal Reserve's key functions — one that is part of a larger mission to help oversee the country’s monetary policy.
So, what exactly is the Federal Reserve? Known simply as the "Fed," it serves as the central bank for the U.S.
"Being a central bank means that it has a few functions, the main one being that it's in charge of what we in economics say is the monetary and credit systems here in the United States," said Thomas Stockwell, Assistant Professor of Economics at the University of Tampa.
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The Fed performs several essential functions, with the most well-known being its influence on the country's monetary policy. Its goal? Keeping employment high and inflation stable.
This is primarily achieved by determining the federal funds rate, commonly referred to as the Fed's interest rate. This rate dictates how much banks borrow from each other and ultimately influences what consumers pay on various loans, from home mortgages to credit cards.
"If you put upward pressure on the federal funds, all of other interest rates are going to go up with it, including the mortgage rate, the interest rates you pay in your car, whatever interest rate, they're all going to move in the same direction," Stockwell explained.
A significant responsibility, the federal funds rate is determined by the Federal Open Market Committee (FOMC). This body is made up of seven Fed governors appointed by the president and confirmed by the Senate, along with five of the twelve regional Fed bank presidents. Their work is overseen by the Fed Chair, who is also nominated by the president.
"Being chairman of the Federal Reserve is one of the most powerful positions on the planet," Stockwell noted. "And you can honestly maybe even argue right up there with the president of the United States."
The Federal Reserve maintains frequent communications with the executive branch and congressional lawmakers. However, it was designed to make decisions independently to ensure that fiscal policy isn't influenced by politics.
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