The Federal Reserve System (“Fed”) is the central bank of the US. It was established by Congress in 1913 in the wake of the Great Depression with the primary functions of conducting the nation’s monetary policy, maintaining stability of the financial system, and supervising and regulating banking institutions. The Fed is considered independent but is subject to congressional oversight.

The Fed is America’s third national bank. The first was created by George Washington and Alexander Hamilton in 1791. Its charter expired, and a second national bank was created in 1816. Andrew Jackson famously killed it in 1829 upon taking office.

The Fed’s original and primary monetary policy mandate is maintaining price stability, i.e., keeping inflation in check. (The second, seemingly conflicting mandate is maximum employment.) As former Fed Chairman Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon…” When inflation increases above the target level set by the Fed, the Fed kicks into action. It has many tools at its disposal including the Federal Funds Rate. Inflation high…raise the Fed Funds Rate. And changes to the rate trigger a chain of events that flow through the economy.

Thanks to several extraordinary factors, such as global supply-chain disruptions, geopolitical events and economic reopening from Covid lockdowns, inflation spiked and reached a high of 9.1% last June. Though slow to respond, the Fed came through with Fed Funds Rate hikes to dampen economic growth. As of this writing, the Fed has hiked the rate to a range of 4.50-4.75%.

Eight times a year, the Fed holds a Federal Open Market Committee (FOMC) meeting in which it decides, amongst other things, the level of the Fed Funds Rate. Ahead of every meeting, Wall Street and financial media pundits froth at the mouth pontificating over what the Fed will do. It makes for news but not for investment returns.

Investors should pay attention to the current Fed policy stance (accommodative or “dovish” vs. restrictive or “hawkish”) and understand how it affects the economy and financial markets. But investors need not fret over the result of every FOMC meeting. Though inflation may stay higher for longer than policy makers like, the markets have largely come to grips with the inflation reality that is currently known.