The Federal Reserve Explained: What It Does and Why It’s Powerful

If you’ve ever wondered who’s steering the U.S. economy when interest rates climb or jobs numbers shift, the Federal Reserve—often just called “the Fed”—is likely the answer.

It’s not a government agency in the traditional sense, nor is it a private bank, but it wields enormous influence over your wallet, the stock market, and global finance.

As of September 25, 2025, with mortgage rates hovering around 6.2% and inflation at 2.5%, the Fed’s recent moves are on everyone’s mind.

Let’s break down what this mysterious institution does, how it works, and why its power shapes so much of our lives.

What Is the Federal Reserve?

The Federal Reserve is the central bank of the United States, created in 1913 through the Federal Reserve Act to provide a safer, more flexible financial system after a series of banking panics.

It’s a unique hybrid: independent from direct political control but accountable to Congress, with a board appointed by the president and confirmed by the Senate.

The Fed has 12 regional banks across the country—think Boston, New York, San Francisco—each with a say, but the Board of Governors in Washington, D.C., sets the tone.

Its mission, as laid out on its website, is a dual mandate: maximizing employment and stabilizing prices (keeping inflation in check).

That sounds simple, but it’s a juggling act that impacts everything from your car loan to the dollar’s value worldwide.

As Fed Chair Jerome Powell said in a 2022 speech, “Our job is to foster a strong economy for all Americans, and that requires balancing these goals.”

What Does the Federal Reserve Do?

The Fed has several key tools to manage the economy, and they’re worth understanding:

Setting Interest Rates: The Federal Open Market Committee (FOMC), made up of 12 members including the governors and regional bank presidents, decides the federal funds rate—the interest banks charge each other overnight. This rate ripples out, influencing mortgage rates (6.2% for 30-year loans as of September 2025, per Freddie Mac) and credit card rates. When the Fed raised rates to combat 9.1% inflation in 2022, per the Bureau of Labor Statistics (BLS), borrowing costs soared, slowing spending.
Controlling the Money Supply: Through open market operations, the Fed buys or sells government securities to adjust how much money is floating around. Buying bonds pumps cash into the economy; selling pulls it back. During the 2008 financial crisis, the Fed injected trillions via quantitative easing, per the Federal Reserve Bank of St. Louis, to stabilize markets.
Regulating Banks: The Fed oversees banks to ensure they’re stable and compliant, from capital requirements to stress tests. After Silicon Valley Bank’s 2023 collapse, the Fed tightened oversight, per a 2024 report from the Office of the Comptroller of the Currency (OCC).
Acting as Lender of Last Resort: In a pinch, the Fed lends to banks to prevent collapses. The 2020 COVID-19 crisis saw it launch emergency programs, lending $2.3 trillion, per the Fed’s financial statements.
Monitoring the Economy: The Fed crunches data on jobs, inflation, and growth to guide its decisions. Its Beige Book, released eight times a year, offers a snapshot—August 2025 noted moderate growth but rising labor costs, hinting at future rate considerations.

Why Is the Federal Reserve So Powerful?

The Fed’s influence is hard to overstate, and it stems from a few key factors:

Economic Leverage: By tweaking interest rates, the Fed can cool an overheating economy or spark growth. The 1980s rate hikes to 20% tamed inflation but triggered a recession, per the BLS, showing its double-edged sword. Today, with rates at 4.75% (as of the September 2025 FOMC meeting), it’s balancing inflation and employment.
Global Impact: The U.S. dollar is the world’s reserve currency, and Fed policies affect international markets. When it tightened policy in 2022, emerging markets like Turkey saw currency crises, per the International Monetary Fund (IMF).
Independence: Unlike Congress, the Fed isn’t swayed by election cycles, giving it room to make unpopular but necessary moves. Economist Milton Friedman once said, “The Fed’s independence is the cornerstone of sound monetary policy,” though critics argue it lacks accountability.
Market Confidence: Investors hang on FOMC announcements. A 25-basis-point rate cut in 2019 lifted the S&P 500 by 1.2% that day, per Yahoo Finance, showing how its words move billions.

The Pros and Cons

The Fed’s power comes with trade-offs:

Pros: It stabilizes the economy, preventing runs on banks or runaway inflation. The 2020 response likely saved millions of jobs, per a 2021 Federal Reserve study.
Cons: Its moves can hurt. Rate hikes raise borrowing costs—my friend refinanced his mortgage in 2023 and saw payments jump $400 monthly. Critics, like Senator Elizabeth Warren, have called it out for favoring Wall Street, pointing to 2008 bailouts over Main Street relief.

Political and Economic Tensions

The Fed isn’t above the fray.

Congress can amend its mandate, and presidents often pressure it—Trump’s 2018 tweets urging lower rates are a famous example, per The New York Times.

In 2025, with a divided Congress, some lawmakers push to audit the Fed, arguing it’s too opaque, while others defend its autonomy.

The 1978 Humphrey-Hawkins Act cemented its dual mandate, but debates persist over prioritizing jobs or prices.

What It Means for You

The Fed’s actions hit close to home:

Borrowing: Higher rates mean pricier loans—my car payment went up 10% in 2023.
Savings: Low rates hurt savers, but 4-5% APY high-yield accounts (per Bankrate, 2025) now offer relief.
Jobs: Its policies influence hiring—unemployment was 4.1% in August 2025, per BLS, reflecting its balancing act.

Final Thoughts

The Federal Reserve is a powerhouse that keeps the U.S. economy humming, using interest rates, money supply, and oversight to steer us through booms and busts.

Its independence gives it clout, but that power sparks debates about fairness and transparency.

Whether you’re eyeing a mortgage or watching your 401(k), the Fed’s moves matter.

As we sit here on September 25, 2025, its next steps will shape the months ahead—stay informed and ready.

For more, check Federal Reserve (federalreserve.gov) for policies, BLS (bls.gov) for data, or IMF (imf.org) for global insights.

Luckily for you, FrankNez Media publishes the latest in U.S. economics, politics, and financial news to keep you informed.

Also Read: What Happens During a Recession? A Breakdown for Everyday Readers