What the Federal Reserve is
The Federal Reserve, usually called "the Fed", is the central bank of the United States. It sets US monetary policy, supervises parts of the banking system and keeps the payment system running.
The US dollar is used in most global trade and finance. Fed decisions therefore move far more than US markets. They affect exchange rates, gold, oil, bond yields and stock indices worldwide, including the costs that matter for Pakistan's economy.
- The central bank raises its policy rate, or signals that it will.
- Deposits and bonds in that currency start to pay more.
- Investors move money into the currency to earn the higher yield.
- The currency tends to strengthen; a rate cut usually works the other way.
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The Fed's mandate
Congress gives the Fed a mandate of maximum employment and stable prices, along with moderate long-term interest rates. The Fed publishes its own longer-run inflation goal in an official statement on its website.
When inflation runs above that goal, the Fed tends to keep policy tight. When the job market weakens and inflation is under control, it has more room to ease. Traders follow US data for this reason, especially:
- Consumer Price Index and PCE inflation. PCE is the inflation measure the Fed refers to in its goal.
- Non-farm payrolls, unemployment and labour data and jobless claims
Who decides: the FOMC and its meeting rhythm
Rate decisions are made by the Federal Open Market Committee (FOMC). It is made up of the Board of Governors in Washington and presidents of the regional Federal Reserve Banks. Some regional presidents vote on a rotating basis.
The FOMC meets on a fixed schedule that it publishes in advance on the official Federal Reserve website. It can also hold unscheduled meetings when conditions require. Do not rely on dates copied from other sites. Check the FOMC meeting calendar on the Fed's official website. Our page on FOMC meetings explains the meeting day in detail.
The fed interest rate and the Fed's tools
The federal funds rate
The main policy rate is the federal funds rate. This is the overnight rate at which banks lend reserves to each other. The FOMC sets a target range for this rate rather than a single number. When news reports say "the Fed raised rates", they mean the target range was moved up.
For the current range, use the Fed's official policy rate and implementation note pages. Daily figures for the effective rate are published through the Federal Reserve Bank of New York. We do not quote rates on this page that do not come from an official feed.
How the Fed holds the rate in its range
- Interest on reserve balances (IORB): the rate the Fed pays banks on reserves held with it. It is the main tool for steering the market rate.
- Overnight reverse repo facility: a floor that money market funds and others can use.
- Discount window: lending to banks at the primary credit rate.
- Open market operations: buying and selling securities to manage reserves.
Balance sheet and communication
- Quantitative easing and tightening: large purchases or run-off of Treasuries and mortgage securities. See QE and QT.
- Forward guidance: signals about the future path of rates. See forward guidance.
How statements, projections and minutes are read
| Release | When | What traders look for |
|---|---|---|
| Policy statement | At the end of each meeting | Rate change, changed wording, vote split, dissents |
| Press conference | After the statement | The Chair's tone and answers about the next steps |
| Summary of Economic Projections | At selected meetings, marked on the official calendar | Projected rates in the dot plot, plus inflation and growth projections |
| Minutes | A few weeks after the meeting | How broad the agreement was and which risks members discussed |
| Speeches and testimony | Between meetings | Changes in views of individual members |
Experienced readers compare the new statement with the previous one word by word. A small change, such as a dropped phrase about "further adjustments", can matter more than the rate decision itself.
Language that leans towards higher rates is called hawkish. Language that leans towards lower rates is called dovish. See hawkish vs dovish.
Why markets react: expectations versus surprise
By the time of a Fed rate decision, markets have usually priced in an expected outcome through interest rate futures and short-term Treasury yields. The price reaction depends on the gap between the result and that expectation, not on the decision alone.
A widely expected rate change can leave the dollar flat. An unchanged rate with an unexpectedly hawkish outlook can lift it.
The usual chain of effects runs like this:
- Expectations for US rates change.
- US bond yields and real interest rates adjust.
- The rate difference between the US and other countries shifts.
- Money moves, and the dollar and dollar-priced assets reprice.
These patterns are typical tendencies, not rules. Other news can override them.
Which pairs and markets react, and why
| Market | Typical link to the Fed |
|---|---|
| EURUSD, GBPUSD | Move with the rate gap between the US and the euro area or the UK |
| USDJPY | Very sensitive to US yields, because Japanese rates have long been low |
| AUDUSD, NZDUSD | Combine the rate gap with global risk-on, risk-off mood |
| USDCAD | US rates plus oil prices |
| USDCHF | US rates plus safe-haven flows |
| XAUUSD (gold) | Gold pays no interest, so higher real yields and a firmer dollar tend to weigh on it |
| US indices such as US100 | Higher expected rates reduce the present value of future earnings |
| US Dollar Index | Summarises the dollar against a basket of major currencies |
Trading conditions around Fed events
Around the statement and the press conference, liquidity can thin out. Spreads can widen, orders can fill at worse prices than requested (slippage), and prices can jump past stop-loss levels.
Leveraged CFD and forex trading can lose money fast, and news events make this more likely. Read risk management before trading any central bank event. Using a demo account lets you watch how prices behave on these days without real money at stake.
The Pakistan angle
Fed policy affects global dollar funding, oil prices and capital flows. These feed into the rupee and into decisions by the State Bank of Pakistan. The SBP's latest decision on our record is: SBP policy rate raised by 50 bps to 12% with effect from 27.10.2026 (MPC). For more context, see SBP rates and economy.
There is also a legal point. Per the SBP, remitting foreign exchange to overseas forex/margin/CFD platforms is not allowed through any payment channel (FERA s.5(1)). Per the SECP, offshore platforms have no Pakistani licence or oversight and offer no legal protection or recourse. Read law and regulators before opening any account.
Frequently asked questions
What is the Fed's interest rate?
It is the target range for the federal funds rate, set by the FOMC. Check the current range on the Fed's official website.
How often does the Fed decide on rates?
The FOMC meets on a published schedule and can also hold unscheduled meetings. Use the official FOMC calendar for exact dates.
Why does the dollar sometimes fall after a rate hike?
The hike may have been fully priced in. A softer outlook than expected can outweigh the decision itself.
What is the difference between the statement and the minutes?
The statement gives the decision on the day. The minutes come a few weeks later and show the committee's debate in more detail.
Does this page say which way to trade the Fed?
No. It explains how the mechanism works and how markets typically react. It gives no forecasts or trade ideas.