What the Federal Reserve actually does

The Federal Reserve — 'the Fed' — is the central bank of the United States. It has two main jobs by law: keep prices stable (target inflation around 2%) and keep employment high. Everything else it does flows from these two mandates. It does not 'print money' in the way people often imagine. It influences the economy through interest rates and the banking system.

The main tool: the federal funds rate

The Federal Open Market Committee (FOMC) meets eight times a year and sets a target for the federal funds rate — the interest rate banks charge each other for overnight loans. This rate ripples through the entire economy: mortgages, credit cards, savings accounts, business loans. Lower rates encourage borrowing and spending. Higher rates discourage it.

When the economy overheats (high inflation)

The Fed raises rates. Borrowing gets more expensive, spending slows, demand cools, prices rise slower. The intended side effect — slower economic growth and some job losses — is a feature, not a bug, because the goal is to rebalance demand against supply.

When the economy stalls (recession)

The Fed lowers rates. Borrowing gets cheap, spending picks up, hiring resumes. The intended side effect here is modest inflation, which is acceptable as long as it stays controlled.

What the Fed does NOT do

• Set mortgage rates directly (those follow the 10-year Treasury, not the federal funds rate exactly).
• Control stock prices (it can influence them indirectly but doesn't target them).
• Fight unemployment that comes from non-monetary causes like trade or structural change.
• Create jobs directly. That's the government's job via fiscal policy, which the Fed has no control over.