What is the Federal Reserve and why does it matter?
Editorial staff, J.P. Morgan Wealth Management
- The Federal Reserve System began in 1913 through the Federal Reserve Act.
- The Federal Reserve (sometimes referred to as the “Fed”) comprises three distinct entities: the Board of Governors, 12 Federal Reserve Banks and the Federal Open Market Committee.
- The Fed’s dual mandate – seeking maximum employment and price stability in the U.S. – influences its decision on whether to increase or decrease interest rates.
If you’ve read the news lately, you’ve likely heard of the Federal Reserve. As the central bank of the U.S., the Fed aims to keep the economy balanced. The actions it takes to achieve that balance, though, can have a broader impact on the economy – and even your personal finances.
In this guide, we’ll share what the Federal Reserve is, what it does and how it may affect your personal finances.
When was the Fed created?
The 1913 Federal Reserve Act established the Federal Reserve System. It serves as the United States’ central bank and implements monetary policy, which in turn influences the economy.
Who is in the Fed?
The Federal Reserve System is made up of three distinct entities:
- The Federal Reserve Board of Governors, a federal agency located in Washington, D.C.
- 12 Federal Reserve Banks, each located in a different geographic region, or ”district.”
- The Federal Open Market Committee (FOMC), composed of 12 voting members from the Federal Reserve System.
Who appoints the Fed chairman?
You may have heard of Jerome Powell, the current chair of the Board of Governors of the Federal Reserve System. Powell assumed the role in 2018 and was reappointed for another four-year term starting in 2022.
Running the Federal Reserve is a significant responsibility. As such, all seven members of the Board of Governors, including the chair, are nominated by the president of the United States and confirmed by the U.S. Senate. Members serve 14-year terms, while the chair and vice chair serve in their roles for four years.
As of mid-2025 the Board of Governors members are as follows:
- Jerome H. Powell, chair
- Philip N. Jefferson, vice chair
- Michael S. Barr
- Michelle W. Bowman
- Lisa D. Cook
- Adriana D. Kugler
- Christopher J. Waller
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What does the Fed do?
The Federal Reserve at its core serves the U.S. public and influences the U.S. economy by:
- Conducting monetary policy
- Promoting stability within financial systems
- Overseeing and regulating financial institutions
- Fostering both safety and efficiency for payment and settlement systems
- Protecting consumers and promoting community development
One of the primary functions of the Fed – more specifically, the FOMC – is to meet and discuss the direction of the federal funds rate. The federal funds rate is often referred to as “interest rates” when you read about them in in the news, although there is a distinction between the federal funds rate and interest rates you receive as a consumer. This will be covered more in-depth later on.
The Fed has what’s often referred to as a “dual mandate” of facilitating maximum employment and ensuring price stability. The FOMC adjusts the federal funds rate in an effort to reach these dual goals. In 2025, for example, the FOMC has kept the federal funds rate unchanged in response to elevated inflation (upward of 2%) and ongoing economic uncertainty. The current federal funds rate is between 4.25% and 4.5%.
So what does this mean for you? The federal funds rate has an indirect relationship with the interest rates you see as a consumer, as banks and other financial institutions generally refer to the federal funds rate when setting the prime rate.
The prime rate refers to the interest rate set by a bank or credit union. It’s typically used as a benchmark interest rate and influences the rates placed on various loan products. Although individual financial institutions determine their own prime rate, banks and credit unions generally add 3% to the federal funds rate to calculate their prime rate. The current prime rate is 7.5%: 4.5% plus 3%.
A higher federal funds rate means a higher prime rate. In turn, a higher prime rate can increase the cost of borrowing and the annual percentage rate (APR) you see on loan products.
Lenders usually add several percentage points to the prime rate to determine the APR margin. As a consumer, the APR you receive depends on several factors, including the lender’s underwriting criteria.
The Federal Reserve may keep the federal funds rate elevated to some degree to help reduce inflation and slow down the economy. Alternatively, it may decide to drop the federal funds rate to stimulate the economy. The idea is that a low federal funds rate theoretically makes it more affordable to borrow and spend money, which in turn encourages businesses to boost employment.
At the start of the COVID-19 pandemic in March 2020, the federal funds target rate was slashed to a range of 0% to 0.25%. Such low rates influenced mortgage rates, which dropped significantly and jumpstarted a pandemic-era homebuying spree. By June 2022, however, inflation was 9.1% year-over-year, which prompted a different set of actions from the Fed.
Since March 2022, the FOMC has raised the federal funds rate several times, ultimately resulting in the current relatively high-rate environment. Despite several rate cuts in 2024, the federal funds rate remains much higher than it was at the start of the pandemic, and that is by design.
When does the Fed meet?
The FOMC has eight meetings on the books each year, with additional meetings scheduled as needed. It’s at these meetings that the 12 committee members discuss the monetary policy that ultimately determines whether the federal funds rate increases, decreases or remains the same.
Who are the 12 voting members of the FOMC?
- The seven-member Board of Governors
- The president of the Federal Reserve Bank of New York
- Four of the 11 other Reserve Bank presidents (each serves a one-year term)
Beyond the voting members, the other seven Reserve Bank presidents also attend FOMC meetings and contribute to discussions.
The remaining 2025 FOMC meetings are:
- July 29–30
- September 16–17
- October 28–29
- December 9–10
Why it’s important as an investor to watch what the Fed is doing
As an investor, you’ll want to keep your eyes on what the Fed is doing, as its actions can affect your personal finances. Where the federal funds rate stands affects the cost of borrowing and how much you earn in various savings vehicles.
For example, an increase in interest rates could lead to companies tightening their belts as borrowing becomes more expensive. Such tightening could affect stock prices and the larger market. Bonds typically have an inverse relationship with interest rates; that is, when interest rates increase, the value of bonds will likely decrease. For specifics on how interest rates could impact your portfolio, you may want to talk to a financial professional.
The bottom line
The Federal Reserve System is the sum of many parts that work together to keep the economy running. Its actions influence interest rates, which make it more expensive or more affordable for consumers and investors to borrow money. The Fed also has a broader impact on the stock market. Put simply, the Fed’s actions reveal a great deal about the larger U.S. economy and might affect you and your wallet.
Frequently asked questions about the Federal Reserve
The U.S. president can’t simply fire the Fed chairman over a disagreement; the latter can only be removed “for cause.” This is stipulated in the Federal Reserve Act and has been interpreted by U.S. courts to mean misconduct, neglect of duty or malfeasance in office.
When the Fed decides to cut interest rates depends on many factors. First and foremost, interest rate decisions are guided by the Fed’s dual mandate, which aims for maximum employment and price stability. The Fed typically lowers interest rates to help stimulate the economy.
The Federal Reserve was created through the Federal Reserve Act and isn’t technically owned by a person or an agency. However, the Board of Governors is accountable to the U.S. Congress.
The Federal Reserve consists of three entities. The Board of Governors is a government agency, and the FOMC includes those board members. The 12 Federal Reserve Banks are not part of the federal government – although parts are considered government entities, the Fed is also considered independent within the government and ultimately serves the American public.
The Fed itself does not print money. Instead, the U.S. Mint produces coins, and the U.S. Treasury’s Bureau of Engraving and Printing prints paper currency. The Federal Reserve, however, does distribute currency and can increase or decrease the monetary supply.
The Federal Reserve Banks are in 12 different cities: Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York, Philadelphia, Richmond, San Francisco and St. Louis. Each Federal Reserve Bank covers a different territory comprising multiple states.
The Federal Reserve Board of Governors is a government agency held accountable to Congress. However, the 12 Federal Reserve Banks are not considered government agencies. While they serve the public and exist because of Congress, they are set up as private corporations.
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Editorial staff, J.P. Morgan Wealth Management
