Federal Reserve
The U.S. central bank — its rate decisions and forward guidance move global markets more than any other single institution.
The Federal Reserve (the "Fed") is the central bank of the United States, established in 1913. Its dual mandate is maximum employment and stable prices (targeting ~2% inflation). The Fed's main tools are the federal funds rate, open market operations, and the size of its balance sheet.
Because the U.S. dollar is the world's reserve currency, Fed policy reverberates globally. A hawkish Fed tightens global dollar liquidity, strengthens the dollar, and pressures emerging markets. A dovish pivot can ignite risk rallies across asset classes worldwide.
Example
In March 2020, the Fed cut rates to zero and launched unlimited QE within days of pandemic shutdowns. Global equities bottomed almost immediately, and risk assets roared back for the next 20 months.
Related Terms
Central Bank
A national institution that manages monetary policy, controls money supply, and acts as a lender of last resort to the banking system.
BeginnerConsumer Price Index (CPI)
Tracks changes in the price of a fixed basket of consumer goods and services — the most closely watched inflation gauge.
BeginnerCore PCE
The Fed's preferred inflation gauge: the PCE price index excluding food and energy — the gauge the Fed watches to track its 2% inflation goal.
IntermediateFOMC
The Federal Open Market Committee — the Fed body that sets U.S. monetary policy, meeting eight times per year to vote on the federal funds rate target.
IntermediateHawkish
A monetary policy stance favouring higher interest rates and tighter financial conditions to combat inflation — the opposite of dovish.
IntermediateInflation
The rate at which the general price level of goods and services rises, eroding purchasing power over time.
BeginnerInterest Rate
The cost of borrowing money, set or influenced by central banks — the single most powerful lever in macroeconomics.
BeginnerMonetary Policy
Central bank actions — rate changes, asset purchases, reserve requirements — designed to control inflation and support employment.
BeginnerMoney Supply
The total stock of money in circulation — tracked via M1, M2, and M3 aggregates — a key input to inflation and liquidity analysis.
IntermediateNon-Farm Payrolls (NFP)
Monthly count of new U.S. jobs added outside the farm sector — the most volatility-generating data release on the macro calendar.
BeginnerProducer Price Index (PPI)
Measures price changes at the wholesale/producer level — a leading indicator of consumer inflation since input costs roll into retail prices.
IntermediateQuantitative Easing (QE)
A central bank's large-scale asset purchases that inject liquidity into the system and push down long-term interest rates.
IntermediateQuantitative Tightening (QT)
A central bank's deliberate shrinkage of its balance sheet by allowing bonds to mature without reinvestment, draining liquidity from the system.
AdvancedTapering
The gradual reduction in the pace of a central bank's asset purchases — a step toward tightening that precedes rate hikes and signals the end of QE.
IntermediateUnemployment Rate
The share of the labor force actively seeking work but unable to find it — a key input to central bank employment mandates.
Beginner