In this edition of TPO Explains, we break down the Federal Reserve, explaining how the central bank manages the economy through interest rates and money supply, and how its structure supports those decisions.
February 7, 2026
What is the Federal Reserve?
The Federal Reserve (AKA “the Fed”) is the U.S.’s Central Bank, or main monetary authority.
It’s the bank for America’s banks, tasked with keeping the economy healthy and stable by setting monetary policy, controlling money supply, and setting interest rates.
Right, but what is it?
There are three parts:
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Board of Governors: Seven Governors appointed by the president and confirmed by the Senate to staggered 14-year terms. They give monetary direction (e.g., inflation should be 2%), regulate banks, and report to Congress on the economy’s status.
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12 Regional Banks (see map): They monitor regional economic conditions, ensure local compliance with regulations, and operate the nation’s payment systems (think electronic funds transfers).
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Federal Open Markets Committee (FOMC): A committee that sets interest rates; it’s made up of the Governors and some of the Regional Bank presidents.
You mentioned controlling the money supply…?
Yep, the Fed can create (and destroy) money.
The U.S. Treasury actually prints physical money, but it does so at the Fed’s direction. The central bank also creates money digitally by “purchasing” government bonds from banks with money that previously didn’t exist. The banks sell the Fed a bond, the Fed credits the bank with more reserves, and poof more U.S. currency is born.
So, it just creates more money?
Sometimes, but not always, because creating more money causes inflation.
The Fed has a “dual mandate” from Congress: keep employment high and inflation low. It does this by balancing the money supply and moving interest rates, but the two goals are in conflict:
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Lower interest rates → more spending → economic growth → more jobs → higher inflation
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High interest rates → less spending → economic decline → layoffs → lower inflation
What does it mean that the Fed is “independent”?
It’s a government agency that can make policy decisions against the will of Congress and the president, protecting Fed Governers from being fired in all but the most extreme cases (it’s never happened).
The goal is to insulate the Fed from short-term political pressure that may cause long-term economic harm. But having a massively powerful agency with minimal accountability also creates problems, and has gained the central bank many critics. Learn more about that in today’s TPO Explains podcast episode.
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CHRISTIAN PERSPECTIVE
Money is usually on everyone’s mind, and often not for good reasons. Whether you’re thinking about federal monetary policy or personal finances, remember that these are fleeting things. Surrender anything you do have; it’s the Lord’s anyway, and trust Him with everything you feel you don’t have.
“Keep your life free from the love of money. Be satisfied with what you have, for he himself has said, ‘I will never leave you or abandon you.’ Therefore, we may boldly say, ‘The Lord is my helper; I will not be afraid. What can man do to me?’”
Hebrews 13:5–6 (CSB) (read full passage)
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