What is the Federal Reserve (the Fed)?

The Federal Reserve — "the Fed" — is the central bank of the United States. It sets US interest rates, manages the supply of dollars, and works to keep the economy stable. Because the dollar is the world's reserve currency and sits on one side of most forex pairs, no institution moves the currency market more than the Fed.

What does the Fed actually do?

The Fed operates on a dual mandate set by Congress: maximum employment and stable prices, with an inflation target of 2%. To steer between them it adjusts the federal funds rate — the benchmark US interest rate — and, in extraordinary times, buys or sells bonds to add or drain money from the system. Every other tool serves those two goals.

Who decides, and when?

Rate decisions are made by the FOMC, the Federal Open Market Committee, which meets eight times a year. Each meeting ends with a rate decision, a statement, and — four times a year — economic projections including the "dot plot" of where members expect rates to go. The Chair's press conference afterwards often moves markets more than the decision itself.

Why does it move forex?

When the Fed raises rates, dollar assets pay more, foreign capital flows in to capture the yield, and the dollar tends to strengthen — pushing EUR/USD down, USD/JPY up, and so on. When it cuts, the reverse. Traders don't just react to the decision; they trade the expectation of it for weeks beforehand, which is why Fed speakers and US inflation data swing pairs long before a meeting.

Hawkish vs dovish

A Fed leaning toward higher rates to fight inflation is "hawkish" (dollar-positive); one leaning toward cuts to support growth is "dovish" (dollar-negative). Reading whether the latest statement tilted hawkish or dovish is one of the most valuable skills in macro trading.

The Fed vs the rest

The Fed is one of several major central banks — alongside the ECB, the Bank of Japan, and the Bank of England — but its reach is unique because so much global trade, debt, and reserves are priced in dollars. When the Fed tightens, the ripple hits currencies, bonds, and stocks worldwide, not just the US.

The takeaway

Treat the Fed as the gravitational center of the forex market. Know the date of the next FOMC meeting, whether inflation is pushing the Fed hawkish or dovish, and how the market is already positioned — and you understand most of what's driving the dollar on any given day.