On 16 September 2026, the Federal Reserve raised interest rates for the first time since July 2023. The vote was 12 to 0. The reason given was inflation, which has been above the Fed's 2% target for more than five years.
That one decision feeds into mortgage rates, bond prices, the dollar and share prices. Here is what the Fed is, what it has been asked to do and the tools it uses to do it.
What does the Fed do? The Federal Reserve is the central bank of the United States. It sets short-term interest rates, manages the money banks hold with it and lends to banks in a crisis.
Congress gave it two main goals, maximum employment and stable prices. This is called the dual mandate.
Its main tool is the Federal Funds Rate. After the September 2026 rise, the target range is 3.75% to 4%.
It also buys and sells bonds. That changes the size of its balance sheet and moves long-term interest rates.
What the Federal Reserve is
The Fed was created by Congress in 1913. It has three main parts:
The Board of Governors in Washington. It has seven members, each appointed for 14 years. Kevin Warsh has been Chair since 22 May 2026.
Twelve regional Federal Reserve Banks, in cities from Boston to San Francisco.
The Federal Open Market Committee (FOMC), which sets interest rates. It has 12 voting members: the seven governors, the president of the New York Fed and four of the other 11 regional presidents, who take turns.
The FOMC holds eight scheduled meetings a year. Each one ends with a statement on rates.
The dual mandate
Since 1977, the law has asked the Fed to pursue maximum employment and stable prices. Since 2012, the Fed has defined stable prices as 2% a year on the PCE Price Index. We explain that measure in What Is PCE Inflation? and inflation itself in What Is Inflation?
The two goals can pull against each other. Higher rates slow inflation, but they can also cost jobs. Lower rates support jobs, but they can let inflation run. We explain how jobs are measured in What Are Nonfarm Payrolls? and What Is the Unemployment Rate?
Source: FRED (FEDFUNDS, PCEPILFE, UNRATE); YX Insights
The chart shows the Federal Funds Rate against core inflation and unemployment since 2000. Three episodes show the trade-off at work:
2008. As the financial crisis hit, the Fed cut the rate to near zero by December 2008. Unemployment still peaked at 10.0% in October 2009.
2020. The Fed cut to near zero again in March 2020. Unemployment hit 14.8% in April 2020.
2022 to 2023. With inflation surging, the Fed raised the rate from near zero to a range of 5.25% to 5.5%. Unemployment stayed low, falling to 3.4% in April 2023.
In August 2026, core PCE inflation was 3.0%. Unemployment was 4.2% in September, which matched Fed officials' median estimate of the long-run rate. The Fed's statement said inflation remains elevated. It raised rates to bring inflation back to 2%.
Tool 1: the Federal Funds Rate
The Fed steers US interest rates through one overnight rate, the Federal Funds Rate. It is the rate banks charge each other to borrow overnight. We explain how it is measured in What Is the Fed Funds Rate?
The Fed sets a target range for that rate. It then uses the rates it pays and charges banks to keep the market rate inside the range. We explain the mechanics in How the Fed Sets Rates.
That overnight rate flows through to other borrowing costs. It moves the rates on savings accounts, credit cards and business loans. It feeds into Treasury yields and mortgage rates. It also moves the dollar and share prices, because it changes what cash and bonds pay compared with other assets.
The effects take time. A rate rise can take a year or more to show fully in inflation.
Tool 2: the balance sheet
The Fed can also buy bonds, mainly Treasuries and mortgage bonds, paying with money it creates. This is called Quantitative Easing (QE). It pushes down long-term interest rates when short-term rates are already near zero. Selling bonds or letting them mature without replacing them is Quantitative Tightening (QT).
Source: FRED (WALCL); YX Insights
The Fed's balance sheet was $0.87 trillion in January 2007. QE after the 2008 crisis and again in 2020 took it to a peak of $8.97 trillion in April 2022. QT has since cut it to $6.74 trillion, as of 30 September 2026.
In plain terms, this is what money printing means. We test whether it causes inflation in Does Money Printing Cause Inflation?
Tool 3: lender of last resort
When banks cannot borrow anywhere else, the Fed lends to them. The aim is to stop a run on one bank from spreading to the whole system.
In March 2023, after Silicon Valley Bank failed, the Fed set up an emergency lending scheme for banks. Banks could borrow against their Treasury and mortgage bonds at full face value, even though those bonds had fallen in price.
The Fed also supervises large banks, runs stress tests on them and operates the systems banks use to move money between themselves.
What to watch
Fed decisions are easy to follow once you know where to look:
The FOMC statement after each of the eight meetings. It gives the decision and the vote.
The Chair's press conference, the same afternoon.
The dot plot, four times a year. Each official marks where they think rates should be over the next few years.
The minutes, published three weeks after each meeting.
The Fed sets the price of money in the world's largest economy. Its two goals, jobs and stable prices, explain almost every decision it makes.
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