How Does the Federal Reserve Work? Interest Rates Explained in Plain English

The Federal Reserve decides the interest rate that ripples through almost every loan in the United States — mortgages, car loans, credit cards, business borrowing and savings accounts. Yet most people could not explain what the Fed actually is, who runs it, or how a single decision in Washington ends up changing the cost of borrowing.

This article explains it in plain English: what the Federal Reserve is, how it is organised, how it sets interest rates, what it is trying to achieve, and what its next decision means for you.

What the Federal Reserve is

The Federal Reserve — usually just called “the Fed” — is the central bank of the United States. It was created by the Federal Reserve Act of 1913. Its job is not to run the government or to make a profit. It exists to keep the financial system stable and to manage the supply of money and credit in the economy.

The Fed has four broad jobs: conducting monetary policy (setting interest rates), supervising and regulating banks, maintaining financial stability, and operating the nation’s payments system. Of these, monetary policy makes the headlines, because it affects the cost of borrowing for everyone.

The Fed is not a single office and not a private bank. It is a system: a federal agency in Washington working alongside twelve regional Reserve Banks spread across the country — a decentralised design meant to prevent financial power from being concentrated in one city or one branch of government.

Who runs it: three parts

The system has three key parts.

The Board of Governors. This is a federal agency based in Washington, D.C., and the governing body of the whole system. It has seven members, called governors, who are nominated by the President and confirmed by the Senate. Each governor serves a 14-year term, with the terms staggered so that one expires every two years. The long terms are deliberate: they are meant to insulate governors from short-term political pressure. The Chair and Vice Chairs serve four-year terms in those roles. As of October 2026, Kevin Warsh is the Fed Chair, having taken over after Jerome Powell chaired the meetings through April 2026.

The twelve regional Reserve Banks. Each serves a designated geographic district, from Boston to San Francisco. They carry out operations, supervise banks in their districts, and gather economic information from businesses and communities across their regions. Each has a nine-member board of directors linking the Fed to the private sector.

The Federal Open Market Committee (FOMC). This is the body that actually sets interest rates. It has twelve voting members: the seven governors, the president of the Federal Reserve Bank of New York, and four of the other eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis. The FOMC holds eight regularly scheduled meetings a year, and it can meet at other times if needed. Its decisions are announced at 2:00 p.m. Eastern Time on the second day of each meeting, and the Chair holds a press conference at 2:30 p.m. The minutes of each meeting are released three weeks after the decision.

The dual mandate: the Fed’s two jobs

Congress gave the Fed its marching orders in law. Under the Federal Reserve Reform Act of 1977 and later legislation, the Fed must pursue maximum employment, stable prices, and moderate long-term interest rates. The first two goals are the ones that matter most in practice, and economists call them the “dual mandate”.

Maximum employment means the highest level of employment the economy can sustain without pushing inflation up. Stable prices means keeping inflation low and steady — the Fed aims for 2% inflation over the longer run, measured by the personal consumption expenditures (PCE) price index.

The two goals often pull in opposite directions, and that tension is the heart of every interest-rate debate. If rates stay too low for too long, borrowing is cheap, spending rises, and inflation can take off. If rates stay too high, borrowing is expensive, businesses invest less, hiring slows, and unemployment can rise.

How the Fed actually moves interest rates

The Fed does not set mortgage rates, credit card rates, or the rate on your car loan directly. What it sets is a target range for the federal funds rate — the interest rate at which banks lend reserves to each other overnight. That overnight rate is the anchor: when it moves, other short-term rates tend to follow, and over time the change filters through to longer-term borrowing costs.

The Fed steers the federal funds rate mainly through open market operations — buying and selling government securities — and through the interest it pays banks on the reserves they hold at the Fed. It also sets the discount rate, the rate at which banks can borrow directly from the Fed, as a backstop.

Here is how it reaches your wallet. When the Fed raises its target range, banks pay more to borrow overnight, and they pass that cost on. Credit card rates, which are usually tied to the prime rate, tend to rise quickly. Mortgage rates move more slowly, because they depend on long-term bond yields and expectations about future Fed policy as well as the current rate.

Where rates stand now: November 2026

As of Monday 9 November 2026, the federal funds target range is 3.75% to 4.00%. The effective federal funds rate — the rate banks actually paid each other — was 3.88% on 5 November 2026, inside the target range. The interest the Fed pays on reserve balances was 3.90%.

How did we get here? At its meeting on 15–16 September 2026, the FOMC raised the target range by a quarter of a percentage point, from 3.50%–3.75% to 3.75%–4.00%. That was the first increase since 2023. Then, at its meeting on 27–28 October 2026, the FOMC held rates steady at 3.75%–4.00%. The vote was 10–2. Governors Lisa Cook and Beth Hammack dissented — both preferred a quarter-point increase, not a cut. The statement said economic activity was expanding at a strong pace, the unemployment rate had changed little, and inflation remained elevated.

The next scheduled meeting is 8–9 December 2026, and it is a significant one: it comes with a Summary of Economic Projections, the “dot plot” showing where each policymaker expects rates to go, plus a press conference. The decision will be announced at 2:00 p.m. ET on Wednesday 9 December, and the minutes will follow on 30 December. This is the last FOMC meeting of 2026.

What might happen there? After the October jobs report — 165,000 payroll jobs added, unemployment at 4.1% — traders raised the odds of a December hike. The CME FedWatch tool put a 25 basis point December hike at about 80% on the morning of Monday 9 November 2026, up from about two-thirds before the jobs report. A hike would take the range to 4.00%–4.25%. But that is a market bet, not a decision. The Fed will see more data first, including the October consumer price index due on Tuesday 10 November and the November jobs report due on Friday 4 December. For the full jobs picture, see our explainer US Jobs Report Explained: What the Numbers Actually Mean.

Frequently asked questions

What is the federal funds rate?
It is the interest rate banks charge each other for overnight loans of reserves held at the Fed. The FOMC sets a target range for it — currently 3.75% to 4.00% — and steers the actual rate to stay inside that range.

Who decides interest rates in the US?
The Federal Open Market Committee (FOMC), a twelve-member body made up of the seven Board governors, the president of the New York Fed, and four rotating regional Reserve Bank presidents. It meets eight times a year.

When is the Fed’s next decision?
The next FOMC meeting is 8–9 December 2026, with the decision announced at 2:00 p.m. ET on Wednesday 9 December. It is the last meeting of 2026.

The bottom line

The Federal Reserve is a system, not a single person: seven governors in Washington, twelve regional Reserve Banks, and a twelve-member committee that sets rates eight times a year. Its job is to balance two goals — maximum employment and stable prices — by moving the cost of borrowing. Right now the target range is 3.75% to 4.00%, held there on 28 October by a 10–2 vote, with the next decision due on 9 December.

For more on how the wider US economy fits together, read US Economy 2026: Jobs, Inflation and Interest Rates Explained.

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Related reading on WorldForbes

• US Jobs Report Explained: What the Numbers Actually Mean — the October 2026 jobs figures the Fed is watching.
• US Economy 2026: Jobs, Inflation and Interest Rates Explained — the bigger economic picture behind the Fed’s decisions.

Sources

• Board of Governors of the Federal Reserve System, FOMC meeting calendars, federalreserve.gov/monetarypolicy/fomccalendars.htm — eight scheduled meetings a year, December 2026 meeting 8–9 (with Summary of Economic Projections), minutes released three weeks after the decision; last updated 28 October 2026. Verified 9 November 2026.
• Federal Reserve, FOMC statement 28 October 2026, as reported 2–5 November 2026 — target range held at 3.75%–4.00%, vote 10–2, Governors Lisa Cook and Beth Hammack dissenting in favour of a quarter-point increase; economic activity expanding at a strong pace, unemployment changed little, inflation remained elevated. Verified 9 November 2026.
• Federal Reserve rate data, as reported 9 November 2026 — target range 3.75%–4.00% set at the 15–16 September 2026 meeting (a 25 basis point rise from 3.50%–3.75%); effective federal funds rate 3.88% on 5 November 2026; interest on reserve balances 3.90%.
• Federal Reserve Bank of Cleveland, “Understanding the Federal Reserve” (clevelandfed.org) — structure: 12 regional Reserve Banks, seven-member Board of Governors, 12-member FOMC; dual mandate of price stability and maximum employment. Verified 9 November 2026.
• CME FedWatch December 2026 hike odds, morning of Monday 9 November 2026 — about 80%, up from about two-thirds (66.9%) before the October jobs report; a hike would take the range to 4.00%–4.25%.
• US Bureau of Labor Statistics, Employment Situation, October 2026 — payrolls up 165,000, unemployment 4.1% (see WorldForbes jobs explainer).