How the Federal Reserve conducts monetary policy

Our summary

Two Federal Reserve staff explain one of the Fed's core jobs: monetary policy.

• The goals: Congress gave the Fed two goals, maximum employment and stable prices, often called the dual mandate.
• Who decides: the Federal Open Market Committee, made up of the Board of Governors in Washington and the presidents of the regional Federal Reserve Banks.
• The main tool: a target for the federal funds rate, the rate for overnight borrowing between banks.
• Easing vs tightening: lowering the target eases policy and lowers interest rates, which the video says can support asset prices when the economy is sluggish or inflation is too low. Raising it tightens policy when the economy is overheating or inflation is too high.
• Transmission: a change in the target normally moves other interest rates and broader financial conditions, which then affect spending decisions by households and businesses.

Our take: this is a good primer before reading any FOMC headline. It explains why markets react to the Fed even though the Fed sets only one overnight rate directly. See our rates chart.