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Central Banks and Monetary Policy

What the Federal Reserve is trying to achieve, who makes its decisions and how often, how a change in its interest rate target reaches your savings, loans, and investments, and why markets react to its every word.

Lesson 2 of 6 · 5 min read · Intermediate · Members · Last reviewed October 2026

The short version

The Federal Reserve is the US central bank. Congress has given it two goals for monetary policy, maximum employment and stable prices, and it defines stable prices as inflation of 2% a year over the longer run. A committee of 12 voting members, the FOMC, meets eight times a year and sets a target range for the federal funds rate, the rate banks charge each other overnight. Changes in that rate spread to other interest rates, which affect borrowing, spending, hiring, and prices, though slowly and indirectly. In September 2026, with inflation above target, the committee raised its target range to 3.75% to 4%.

By the end of this lesson, you'll be able to

  • Describe the Federal Reserve's two goals and its 2% inflation target
  • Explain who sets monetary policy and how the federal funds rate reaches the wider economy
  • Explain why markets react to the Fed's decisions and expectations about them

Why this matters

Few institutions move financial markets as much as the Federal Reserve. A single sentence in its statement can shift bond yields, mortgage rates, and stock prices within minutes. You don't need to predict what it will do, but understanding what it's trying to achieve, and how its decisions spread through the economy, explains a great deal of what you'll see in markets.

What the Fed is trying to do

Congress has tasked the Federal Reserve with conducting monetary policy to support two goals: maximum employment and stable prices. This is often called the . The Fed describes maximum employment as the highest level of employment the economy can sustain while keeping prices stable, and it has defined stable prices as inflation of 2% over the longer run, measured by the annual change in the price index for personal consumption expenditures.1

The two goals can pull in different directions. Lower rates can support employment but risk pushing inflation up; higher rates can cool inflation but risk slowing hiring. Much of monetary policy is a judgment about that balance.

Who decides, and how often

Monetary policy is set by the (FOMC). It holds eight regularly scheduled meetings a year, and it has 12 voting members: the seven members of the Fed's Board of Governors, the president of the Federal Reserve Bank of New York, and four of the other eleven regional Reserve Bank presidents, who rotate on one-year terms. At each meeting, the committee reviews economic and financial conditions and decides the stance of monetary policy.2

The rest of this lesson is for members

Still to come in this lesson: How a rate decision reaches you, Where policy stood in September 2026, Why markets hang on every word, the key takeaways, and 2 quiz questions with explanations.

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Notes and sources

  1. Board of Governors of the Federal Reserve System. What economic goals does the Federal Reserve seek to achieve through its monetary policy?. Checked 2026-10-06. Back to text
  2. Board of Governors of the Federal Reserve System. Federal Open Market Committee. Checked 2026-10-06. Back to text
  3. Board of Governors of the Federal Reserve System. How does the Federal Reserve affect inflation and employment?. Checked 2026-10-14.
  4. Board of Governors of the Federal Reserve System. Federal Reserve issues FOMC statement (September 16, 2026). Checked 2026-10-06.