The Saturday Briefing: What the Federal Reserve actually does

What moved this week

Coming up

What the Federal Reserve actually does

Last week ended with the dollar cut loose from gold. Something had to take the anchor's place. That something is a committee of twelve people who meet eight times a year, and on Wednesday they meet again.

Who they are

The Federal Reserve is the central bank of the United States, but it is not a single building. The system is designed to spread power out. At the center is the Board of Governors in Washington, D.C., led by the Chairman (currently Kevin Warsh). Spread across the country are twelve regional Fed banks, from New York to San Francisco.

When it is time to make a decision on the economy, they form the Federal Open Market Committee (FOMC). Twelve members vote at these meetings: the seven D.C. Governors, the president of the New York Fed, and four of the remaining regional presidents who rotate into voting seats each year. They are the ones meeting this Wednesday.

What it is built to do

Created by Congress in 1913 after a run of banking panics left the country with no lender of last resort, the Fed sits deliberately between the government and the private sector, which is why arguments about it never quite settle.

Congress gave it two jobs, written into law in 1977 and known as the dual mandate: maximum employment and stable prices. Those two goals pull against each other constantly, and nearly every FOMC decision is a judgment about which one is under more strain today.

The one lever

How it works: The Fed does not set the rate on your mortgage, your car loan, or your savings account. It sets one number, the target range for the federal funds rate, which is what banks charge each other to borrow overnight. Everything else is downstream. Move that one rate and the cost of borrowing shifts across the entire economy within weeks.

Raise it and borrowing costs rise, spending cools, and price growth slows. Lower it and the opposite happens. The FOMC calendar is the reason the macro calendar in this newsletter has eight dates circled every year.

How they actually move the lever

The Fed cannot simply pass a law commanding banks to lend at a specific rate. Instead, it guides the market using pure financial incentives to build a "floor" and a "ceiling."

To build the floor, the Fed pays banks a guaranteed interest rate just to leave their cash safely parked at the central bank (a tool formally called Interest on Reserve Balances, or IORB). Because no bank will lend money to a competitor for less than they can get risk-free from the Fed, this establishes the absolute minimum interest rate in the economy. To build the ceiling, the Fed offers its own direct lending facility (often called the Discount Window). Because no bank will pay a competitor more to borrow money than the Fed is charging, that sets the maximum rate. The federal funds rate simply floats in the narrow gap between that floor and ceiling.

The fallout from the lever

To understand just how much power this one lever wields, look at the whiplash of the last few years. During the 2020 pandemic crash, the Fed slashed its rate to a floor of just 0.00% to 0.25% to flood the economy with cheap borrowing. But fueled by that cheap money, stimulus checks, and supply chain breakdowns, inflation exploded, hitting 9.1% by June 2022—the highest in forty years.

To fight it, the Fed embarked on a brutal tightening cycle, pulling the lever in the opposite direction. Between March 2022 and July 2023, they hiked the federal funds rate 11 times in 16 months, ultimately bringing the target to a peak of 5.25% to 5.50%. The shockwave hit the housing market almost immediately.

The average 30-year fixed mortgage skyrocketed from a historic low of 2.65% in 2021 to nearly 8% in 2023. Even with the Fed easing rates back down to their current 3.50% - 3.75% range at the end of 2025, mortgage rates have stubbornly lingered near 6.6% through 2026. This created the notorious "lock-in effect," where homeowners with 3% mortgages refused to sell, choking the supply of homes and keeping prices near record highs.

The second lever, the one from 2008

Why it exists: Once rates hit zero there is nothing left to cut, and in 2008 that is exactly where they landed. So the Fed started buying bonds directly, creating reserves to do it. That is quantitative easing, and it expanded the Fed's balance sheet from under $1T before the crisis to roughly $9T at its 2022 peak.

This is the part that connects directly back to 1971. A currency with a gold anchor cannot do this. A fiat currency can, and the size of that balance sheet is now one of the most watched numbers in finance.

What it cannot do

It cannot lower the price of oil, unsnarl a supply chain, or create workers who do not exist. Its tools work on demand, not supply, which is why a week like this one matters: Brent up more than 11% is a supply-side shock, and the only instrument pointed at it is a blunt one.

Why this is in a DCA newsletter

Because the Fed's one lever reaches everything the engine measures. Rate expectations move the dollar, the dollar moves risk assets, and the volatility around each decision is exactly what a fixed schedule of contributions is built to absorb. You are not asked to predict Wednesday. The point of averaging in is that you do not have to.

Next Saturday: How fiat inflation actually happens. Tracing the mechanics of money printing, M2 expansion, and why the dollar buys roughly 96% less today than it did when the Fed was created in 1913.

HUD DCA · huddca.com