The Financial Plumbing of the Federal Reserve: How the FOMC Really Works

Every few years, political pressure on the Federal Reserve resurfaces. Right now, President Donald Trump is taking direct aim at the central bank, accusing it of keeping interest rates too high and demanding aggressive cuts to jumpstart the economy. At the same time, the Fed itself has been thrown into the spotlight as Governor Lisa Cook faces a criminal mortgage-fraud probe. The Justice Department has launched an investigation after regulators alleged she misrepresented property statuses on mortgage applications, charges she vehemently disputes as politically motivated and without merit.

The Cook case is more than just an isolated controversy; it's quickly becoming a test of the Fed's independence, with legal battles over her position raising questions about how insulated the central bank truly is from partisan pressure.

The Fed was created in 1913, but its modern role took shape after 1977, when Congress handed it a dual mandate: promote maximum employment and maintain stable prices. Those two goals often pull in opposite directions. Fighting inflation usually requires higher rates, which can cool hiring. Supporting jobs frequently calls for lower rates, which risk fueling inflation. The Fed's task is to navigate this tension, striking a balance that keeps the economy growing without letting prices spiral out of control.

At the top of the system sits the Board of Governors in Washington, D.C., seven members appointed by the President, confirmed by the Senate, and locked into staggered 14-year terms. Those unusually long terms are intentional, giving governors independence from short-term political cycles. From among the seven, the President designates a Chair and a Vice Chair to serve renewable four-year terms. Jerome Powell currently holds the Chair.

The Board oversees the entire Federal Reserve System, supervises the regional banks, sets key regulatory policies, and makes decisions on rates like the discount rate and the interest on reserve balances (IORB). The Chair serves as the Fed's public voice and agenda-setter. Still, it has no more formal voting power than the other governors, a crucial reminder that leadership at the Fed is collective, not dictatorial.

What makes the Fed unusual compared to most central banks is its decentralized design. Twelve regional Federal Reserve Banks stretch across the country, each with its own president and board of directors. Their job is to bring ground-level intelligence into national debates.

Boston monitors labor markets and community development. New York, sitting on Wall Street, handles market operations and foreign exchange. Philadelphia pays close attention to banking supervision and fintech. Cleveland is known for its work on inflation research. Richmond focuses on financial regulation and cybersecurity, while Atlanta studies inequality and mobility. Chicago brings insights on agriculture and manufacturing, St. Louis contributes data (including the famous FRED database) and often hawkish commentary, and Minneapolis dives into systemic risk and crises. Kansas City tracks energy and agriculture and hosts the influential Jackson Hole symposium. Dallas provides a window into oil, gas, and trade with Mexico, and San Francisco offers perspectives on tech, housing affordability, and trade across the Pacific.

This mosaic of voices ensures policy isn't set from Washington alone but reflects the diverse realities of the U.S. economy.

All of this feeds into the Federal Open Market Committee, or FOMC, the Fed's policy-setting body. The FOMC meets eight times a year, or more in a crisis. It consists of the seven governors in Washington, the president of the New York Fed (who holds a permanent seat), and four other regional bank presidents who rotate annually. That rotation ensures different regions—whether agriculture-heavy, energy-driven, or tech-focused—regularly have a say in shaping national policy.

The New York Fed's permanent place is no accident. As the executor of the Fed's market operations—buying and selling Treasuries, managing mortgage-backed securities—it must always be directly at the table.

Once the FOMC makes decisions, the Fed uses a set of tools to carry them out. The most visible is the federal funds rate, the overnight rate banks charge each other, which sets the tone for borrowing costs across the economy, from mortgages to business loans to credit cards.

Alongside it is the discount rate, the rate banks pay when borrowing directly from the Fed. This serves as a kind of emergency backstop. The IORB, meanwhile, pays banks to hold reserves at the Fed and effectively sets a floor under the funds rate.

Then there are open market operations, managed by the New York Fed, which inject or withdraw liquidity by buying and selling Treasuries. And in extraordinary times, the Fed turns to quantitative easing or tightening (QE/QT), using long-term asset purchases or balance-sheet reductions to influence broader financial conditions.

These tools might sound like plumbing valves and pumps, and in a sense, that's precisely what they are. Together, they regulate the flow of credit and liquidity through the financial system, shaping inflation, employment, and growth.

Even though only a fraction of banks lend and borrow reserves daily, the federal funds rate acts as the anchor rate for the entire financial system.

Banks that never touch the fed funds market still adjust their prime lending rates, credit card APRs, mortgage rates, and auto loan terms based on the target rate. Investors worldwide interpret changes in the fed funds rate as signals about the Fed's stance on growth and inflation, with bond yields, equity valuations, and currencies responding accordingly.

When the cost of reserves shifts for active participants, it filters into wholesale funding markets that all banks rely on, altering the cost of liquidity across the system. From there, households and businesses feel the transmission directly through borrowing costs, savings yields, and asset prices.

In short, the fed funds market may be small, but the rate itself is the lever that sets the tone for the entire economy.

The Fed's designers knew political pressure would always loom. That's why they built guardrails: 14-year terms for governors, protections against arbitrary removal, and a decentralized system with regional banks sharing power.

History shows why independence matters. In the 1960s and 70s, presidential pressure to keep rates low contributed to runaway inflation. In the early 1980s, Paul Volcker's Fed pushed rates sharply higher, breaking inflation but causing a painful recession. During the crises of 2008 and 2020, the Fed's ability to act quickly and decisively, without waiting for Congress, stabilized financial markets.

Without independence, short-term political goals, such as boosting growth before an election, could easily overpower long-term stability.

While it might sound abstract, Fed policy shapes daily financial life. A hike in the federal funds rate doesn't directly change your mortgage, but it pushes up Treasury yields, which in turn drive mortgage rates higher. Savers benefit from higher yields on CDs and savings accounts when rates rise. Stock valuations often fall when the Fed tightens and rally when it loosens. A stronger dollar from higher U.S. rates affects the prices of imports and exports. And for businesses, the cost of borrowing can determine whether they hire, expand, or hold back.

The Fed may not mail you a statement, but its fingerprints are on nearly every financial decision you make.

The Fed is insulated from day-to-day politics, but it is not immune. One governor's term was scheduled to expire in January 2026, the seat formerly held by Adriana Kugler, who resigned in August 2025, leaving a vacancy. Separately, Jerome Powell's term as Chair ends in May 2026, though his underlying term as a governor continues until January 2028. That means he could remain on the Board even if a new Chair is appointed.

These overlapping timelines illustrate how the Fed's leadership is deliberately staggered. Long terms, regional input, and a committee structure all serve as guardrails to keep monetary policy focused on stability rather than electoral cycles.

It's easy to reduce the Fed to headlines about rate hikes or the latest political dust-up. But the reality is more complex. The Fed is not one person, not even the Chair. It is a system: seven governors in Washington, twelve regional banks spread across the country, and a committee structure that blends national oversight with regional perspectives.

Understanding how that system works matters for households, businesses, and investors alike. Every rate decision, every balance-sheet move, sends ripples through the financial system. And in moments when politics tests the Fed's independence, remembering its structure helps us see why it was built this way; to safeguard stability above politics and keep the economy's plumbing running, no matter the storm at the surface.