Fed: Federal Reserve role and policy explained

By Ken Chigbo, Founder, KenMacro. Published 2026-05-13.

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What is Fed?

The Federal Reserve is the central bank of the United States, established by the Federal Reserve Act of 1913. It consists of the Board of Governors in Washington, twelve regional Reserve Banks, and the Federal Open Market Committee, known as the FOMC. The Fed conducts monetary policy by setting the federal funds rate target, managing the size of its balance sheet, and regulating banks. Congress has assigned it a dual mandate: maximum employment and price stability, generally interpreted as 2 percent inflation over the longer run. The Chair, currently appointed for four-year terms by the President, leads policy communication and FOMC meetings.

How traders use Fed

Retail and institutional traders treat the Fed as the single most important driver of global macro pricing because the US dollar sits on one side of roughly 88 percent of foreign exchange turnover. The FOMC holds eight scheduled meetings per year, releasing a statement, updated Summary of Economic Projections at four of those meetings, and a press conference with the Chair. The desk tracks the dot plot, the statement language, and pricing on Fed funds futures to gauge where terminal rates sit. Between meetings, speeches from voting members, the Beige Book, and high-tier data such as non-farm payrolls and CPI shape expectations. Currency pairs with the dollar, US Treasury yields, gold, and equity index futures all reprice around these inputs.

Common misconceptions about the Fed

The Fed is often described as setting interest rates directly, but it actually sets a target range for the federal funds rate and uses tools such as interest on reserve balances and reverse repo to steer the effective rate inside that range. A second misconception is that the Fed prints money in a literal sense; balance sheet expansion through asset purchases credits reserves to banks, not cash to the public. Finally, the Fed is independent in its policy decisions but not in its mandate, which is set by Congress and can be revised by legislation.

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Frequently asked

How often does the Fed meet?

The FOMC holds eight regularly scheduled meetings per calendar year, roughly every six weeks. Each meeting produces a policy statement released at 2pm ET, followed thirty minutes later by a press conference with the Chair. Four of these meetings, in March, June, September and December, also include an updated Summary of Economic Projections containing the dot plot. The Fed can also hold unscheduled meetings during crises, as happened during March 2020.

Who chairs the Federal Reserve?

The Chair of the Federal Reserve Board of Governors is nominated by the US President and confirmed by the Senate for a four-year renewable term. The Chair leads FOMC meetings, presents semi-annual monetary policy testimony to Congress, and serves as the principal public voice of the institution. Past Chairs have included Paul Volcker, Alan Greenspan, Ben Bernanke, Janet Yellen and Jerome Powell. Markets pay close attention to every public appearance for policy signals.

What is the difference between the Fed and the FOMC?

The Federal Reserve System is the entire central bank structure, including the Board of Governors and twelve regional Reserve Banks. The FOMC, or Federal Open Market Committee, is the specific policy-setting body within that system that decides on interest rates and balance sheet operations. The FOMC has twelve voting members: the seven Governors, the New York Fed President permanently, and four other regional Presidents on a rotating annual basis.

How does the Fed affect forex markets?

Fed policy moves the US dollar through two main channels: interest rate differentials and risk sentiment. When the Fed raises rates faster than peers such as the ECB or BoJ, dollar-denominated assets offer higher yields, attracting capital and strengthening the dollar. Dovish surprises tend to weaken it. Because the dollar is involved in most major pairs, Fed decisions also indirectly drive crosses, emerging market currencies, gold pricing, and global carry trade flows.

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