Congress controls taxes and spending. The Fed controls the price of money — and has since 1913. It sets the interest rate every other rate is priced from, runs a $6.74 trillion balance sheet that barely existed before 2008, and answers to no voter. This covers what it actually does, a century of rates and crises, how the job changed after the financial crisis, the balancing act between inflation and employment, and why an unelected central bank draws fire from the left and the right at once.
Policy rate, full range
0.05—19.10
% monthly avg · low Apr 2020, high Jun 1981 (FRED FEDFUNDS, from 1954)
June 1981 monthly avg; 22.36% on 22 Jul 1981 (FRED)
Inflation target
2%
PCE, adopted 25 Jan 2012 · running 4.1% in May 2026
Years of independence
75
since the Treasury–Fed Accord, 4 Mar 1951
The short answer
Congress decides how much the government taxes and spends. The Federal Reserve decides what money costs. It sets the overnight rate that every other interest rate is priced from, expands or shrinks a $6.74 trillion balance sheet, lends to banks that would otherwise fail, and supervises the largest of them. Congress gave it two goals — maximum employment and stable prices — and then, deliberately, put it out of reach of the people who gave it those goals.
The federal funds rate
The price of overnight money.
The FOMC sets a target range — currently 3.50–3.75% — for the rate banks charge each other overnight. It does not decree the rate; it makes it happen by paying interest on reserves and offering an overnight facility, so no bank has a reason to lend below the floor or borrow above the ceiling. Every other interest rate in the economy, from mortgages to credit cards to corporate debt, is priced off this one.
The balance sheet
Buying and selling the government’s debt.
When the Fed buys Treasuries or mortgage bonds it creates reserves to pay for them, adding to the money in the system and pushing down long-term rates. That is quantitative easing. Running the process backwards — letting bonds mature without reinvesting — is quantitative tightening. Before 2008 this was a technical operation on a $0.87T balance sheet. It is now a primary policy tool on a $6.74T one.
Lender of last resort
The original job, and the one that never goes away.
The Fed was created in 1913 because the Panic of 1907 had to be stopped by J.P. Morgan personally. A solvent bank facing a run can borrow at the discount window against good collateral. In a genuine crisis, Section 13(3) lets the Fed lend to almost anyone — used in 2008, in 2020, and again in March 2023 when SVB failed.
Bank supervision
Examiner, not just economist.
The Fed writes and enforces capital and liquidity rules for bank holding companies, runs the annual stress tests, and since Dodd–Frank has a Senate-confirmed Vice Chair for Supervision devoted to it. This is the least-discussed half of the institution and the one most likely to be blamed after a failure.
The payments plumbing
The part nobody notices until it stops.
Fedwire moves trillions of dollars a day between banks. FedNow, launched in 2023, settles retail payments instantly. The Reserve Banks also distribute physical currency and clear checks. It is unglamorous infrastructure that happens to be the reason the other functions work.
The two halves of the mandate · 1914 — 20262% target = dashed
CPI-U year-over-year, annual mean of monthly observations (FRED CPIAUCNS, which begins January 1913 — so the first year-over-year figure is 1914). Unemployment is FRED UNRATE, whose first observation is January 1948; no official monthly series runs earlier, so the line starts there rather than being estimated backwards. 2026 covers January–June only.
Only one half has a number
Since 25 January 2012 "stable prices" has meant 2% annual PCE inflation. "Maximum employment" has never been assigned a figure, deliberately — the Fed holds that the sustainable rate of employment is set by forces it does not control and cannot be measured in real time. So one half of the mandate is auditable and the other is a judgement call.
The halves can point opposite ways
When inflation is high and unemployment is rising at the same time, there is no setting that serves both. Rate increases that pull inflation down push unemployment up. 1981–82 is the textbook case: inflation from 13.6% to 3.2%, unemployment to 9.7%. Which half the Fed chooses in that moment is the single most consequential judgement it makes.
Where it stands right now
The June 2026 FOMC statement holds the target range at 3.50–3.75% and describes inflation as "elevated relative to the Committee’s 2 percent goal" while the unemployment rate "has changed little." PCE inflation was 4.1% in May 2026 and has risen every month since February; unemployment was 4.2% in June. The statement closes with a sentence the Fed has not used before: "The Committee will deliver price stability."