Federal Reserve

The Federal Reserve is the central bank of the United States: a seven-member Board of Governors, 12 regional Reserve Banks and the FOMC, which sets monetary policy to pursue maximum employment and price stability.

How the Federal Reserve is structured

The Fed has three main parts. The Board of Governors is the governing body of the system, run by seven governors serving staggered 14-year terms who are nominated by the President and confirmed by the Senate; the Fed describes it as an agency of the federal government that reports to and is directly accountable to Congress. The 12 Reserve Banks and their 24 branches are the operating arms of the system, each covering its own district and operating independently in many respects under Board oversight. The FOMC is a 12-person group of the seven governors, the New York Fed president and four of the remaining eleven Reserve Bank presidents on rotating one-year terms. It meets at least eight times a year and steers policy toward the congressionally mandated goals of maximum employment and price stability.

See FOMC for how meetings work, and quantitative easing and quantitative tightening for the balance-sheet tools.

How Fed decisions reach your portfolio

The Fed's main lever is the target range for the federal funds rate, the overnight rate at which banks lend reserves to one another. Changes to that target move short-term Treasury yields almost immediately and feed through to deposit rates, mortgage rates and the discount rates investors apply to future corporate earnings. The Fed judges inflation of 2 percent over the longer run, measured by the annual change in the PCE price index, to be most consistent with its mandate, and explains that stable inflation expectations let households and businesses make sound saving, borrowing and investment decisions. When the Fed raises its target range, borrowing costs rise and bond prices fall; when it lowers the range, the reverse tends to happen. The committee's statements and projections often move markets as much as the decision itself.

Hypothetical example: the FOMC raises its target by 25 basis points. A bond with a duration of 6 years whose yield rises 0.25% would lose about 1.5%. See the bond duration calculator.