Fed USA: what it is, how it works, and why it shapes the global economy

When people talk about the Fed USA, many think of a distant institution reserved for economists, but its decisions directly affect the lives of millions of people and businesses inside and outside the United States. From the value of the dollar to the interest rates small businesses pay on their loans, the Federal Reserve System plays a central role in global economic stability.

Below, we explain what the Fed is, how it operates, its main functions, and why understanding its role can help you make better decisions if you’re thinking about investing or starting a company in the U.S.

What is the Fed USA?

The Fed USA, short for the Federal Reserve System, is the central bank of the United States. It was created in 1913 by the Federal Reserve Act to provide the country with a safer, more flexible, and more stable financial system. Its headquarters is the Eccles Building in Washington, D.C., and it is composed of a Board of Governors and 12 Federal Reserve Banks spread across the country.

Unlike many other countries, the Fed has a hybrid nature: it combines public and private elements. The Board of Governors represents the public component, while the Reserve Banks—such as those in New York or San Francisco—are more decentralized and operate with a degree of autonomy.

Main functions of the Fed USA

The Fed’s primary mandate boils down to two major goals:

• Maintain price stability (i.e., control inflation).
• Foster maximum sustainable employment.

In addition, it acts as a banking regulator, lender of last resort, and guardian of the country’s monetary policy.

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Among its most relevant functions are:

1. Monetary policy

The Fed uses several tools to influence the amount of money circulating in the economy, including:

• Open market operations: buying or selling Treasury securities. Buying injects money into the system; selling withdraws it.
• Discount rate: the interest rate it charges banks for short-term loans. Raising this rate makes credit more expensive.
• Reserve requirements: the percentage of deposits banks must hold and not lend. Lowering the ratio stimulates credit; raising it restrains lending.

2. Bank supervision and regulation

The Fed supervises and regulates banks to ensure the soundness of the financial system, curb risky practices, and protect consumers.

3. Financial stability

In crises or periods of uncertainty, the Fed can inject liquidity, keep markets functioning, and prevent bank collapses, as seen in 2008 and during the 2020 pandemic.

4. Payment systems

It also oversees the national payments system, ensuring that transfers, checks, and electronic transactions are processed quickly and securely. A recent example of innovation is FedNow, the instant payments service launched by the Fed in 2023.

Structure of the Fed USA

The system is headed by the Board of Governors, composed of seven members appointed by the U.S. President and confirmed by the Senate.
The current Fed Chair (in 2025) is Jerome Powell.

Below the Board are the 12 Federal Reserve Banks, operating in key cities such as New York, Chicago, Dallas, and San Francisco. Each bank has its own president and board, providing a more regional view of the economy.

Finally, the Federal Open Market Committee (FOMC) makes decisions on interest rates and monetary policy measures. It consists of the seven governors and five presidents of regional Reserve Banks.

The Fed and its impact on the global economy

Although its mandate focuses on the U.S. economy, the Fed’s decisions have international effects. When the Fed raises interest rates, the dollar tends to strengthen and capital often flows out of emerging economies, affecting exchange rates and investment flows.

Conversely, when the Fed lowers rates, credit and consumption are stimulated, potentially boosting both the U.S. economy and that of its trading partners.

In Latin America, for example, the Fed’s moves can influence debt costs, inflation, and the stability of local currencies.

Independence and criticisms

The Fed is defined as an independent entity within the federal government, meaning its decisions do not require approval from Congress or the President. However, it must report regularly through public testimonies and written reports.

This independence has sparked criticisms and debate. Some economists argue the Fed lacks transparency; others accuse it of favoring large banks or contributing to asset bubbles.
Even so, most experts agree the Fed has been essential in maintaining financial stability for more than a century.

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How the Fed USA affects entrepreneurs and businesses

If you’re considering starting a business in the United States, understanding the Fed’s decisions can help you anticipate financing costs, interest rates, and investment opportunities.
For example, when the Fed lowers rates, loans for new companies tend to become more accessible, supporting expansion.
In periods of rising rates, it’s wise to manage cash flow prudently and explore long-term financing alternatives.

Ultimately, knowing how the Fed operates helps you understand the economic environment in which you’ll build your company and make more strategic decisions.

Frequently asked questions about the Fed USA

1) What does “Fed” mean in the United States?
“Fed” is short for the Federal Reserve System, the central bank responsible for monetary policy, bank supervision, and the stability of the U.S. financial system.

2) Who controls the Fed USA?
The Fed is led by a Board of Governors in Washington, D.C., and twelve regional banks. Although members are appointed by the President, the institution operates with independence.

3) How does the Fed affect interest rates?
Through the Federal Open Market Committee (FOMC), the Fed adjusts rates to control inflation and to stimulate or cool economic growth.

4) Why do the Fed’s decisions matter outside the U.S.?
Because the U.S. dollar is the most widely used currency in trade and reserves. Any change in its value—or in Fed policy rates—affects global markets, especially in Latin America and Europe.

If you’re evaluating forming a company or expanding your business in the United States, Openbiz can guide you through the legal, accounting, and tax process so you can make informed, secure decisions in a dynamic economic environment.