US Federal Reserve

What it is

The US Federal Reserve is the central bank of the United States, created by the Federal Reserve Act of December 1913. Congress gave it a dual mandate: maximum employment and stable prices. The mandate was codified in the Federal Reserve Reform Act of 1977 and the Humphrey-Hawkins Act of 1978, with a 2% annual inflation target as the operational benchmark.

The Fed has a hybrid structure. The Board of Governors, a seven-member federal agency in Washington DC, governs overall policy; members serve staggered 14-year terms, nominated by the US president and confirmed by the Senate. The Federal Open Market Committee, comprising the seven governors plus five rotating presidents of the twelve regional Federal Reserve Banks, sets the federal funds rate, the overnight interbank lending rate that anchors short-term borrowing costs across the US economy. The New York Fed's open-market desk implements FOMC decisions by buying and selling US Treasuries.

Because the US dollar is the global reserve currency, the FOMC's rate decisions set the cost of dollar-denominated funding worldwide, making the Fed the world's most consequential monetary-policy authority.

History

The Fed was created after the Panic of 1907, when the absence of a lender of last resort allowed a run on trust companies to cascade into a full banking crisis. The US abandoned dollar-gold convertibility in August 1971 under President Nixon.

In the late 1970s, double-digit inflation combined with high unemployment forced the institution's defining test. Chair Paul Volcker raised the federal funds rate to a peak of 20% by June 1981, breaking inflation at the cost of a deep recession. The 2008 financial crisis drove the balance sheet from roughly US$900 billion to over US$4 trillion through quantitative easing; the COVID-19 pandemic response pushed it above US$9 trillion by 2022. Between March 2022 and July 2023, Chair Jerome Powell raised rates eleven times, from near zero to 5.25-5.50%, then began a cutting cycle in late 2024. Kevin Warsh, a former Fed governor and Morgan Stanley investment banker, succeeded Powell as chair in early 2026.

Current state

As of July 2026, the FOMC holds the federal funds rate at 3.50-3.75%. At Warsh's first meeting on June 17, 2026, the committee held steady, but 9 of 18 members projected at least one rate hike before December; Warsh withheld his own projection. The Fed's balance sheet stands at approximately US$6.7 trillion.

Inflation has re-accelerated. May 2026 core PCE came in at 3.4% year-on-year, the highest since October 2023, with headline PCE at 4.1%, partly driven by energy-price pass-through from the Iran conflict. Markets priced a 65% probability of a hike by September. Warsh launched five task forces to review the Fed's communications framework, balance sheet strategy, data sourcing, AI and productivity analysis, and inflation approach, signaling structural changes ahead.

The 2025 debasement trade, the bet that US deficits would erode fiat value, reversed as markets repriced a more hawkish Warsh era.

Politically, the Fed's independence came under direct attack. Trump fired Fed Governor Lisa Cook in 2026. The US Supreme Court blocked the removal 5-4 on June 29, with Chief Justice Roberts writing that the Fed's "tradition of independence" shields its governors; the merits of the underlying case continue in lower courts.

Relationships

The Fed coordinates on financial stability with the US Treasury and the Financial Stability Oversight Council. The Fed chair participates in the Bank for International Settlements' Basel process. Because dollar funding costs ripple through global markets, hawkish Fed repricing feeds directly into currency moves: the yen's slide to multi-decade lows tracks closely with the Warsh rate-hike pricing. The Fed reports to Congress twice a year under the Humphrey-Hawkins framework, a channel that has become politically contested.

What to watch

The September 2026 FOMC meeting is the next decision point; nine members already project a hike, and further PCE acceleration would consolidate that view. The Trump administration's challenge to executive removal power over independent agencies continues in lower courts following the June 29 ruling. Warsh's five task forces are expected to report before year-end; the communications review, which may reform or replace the dot plot, carries the most immediate market implications.