The Federal Reserve is the entity most directly in charge of controlling inflation in the US, using interest rate decisions to steer prices toward its 2 percent annual target. But the Fed does not work alone. Congress shapes prices through taxing and spending, the president influences them through appointments, budgets, and trade policy, and the Treasury Department weighs in on currency issues that affect import costs. No single office holds the whole lever.
The Federal Reserve Leads on Inflation
Congress created the Federal Reserve in 1913 as the nation’s central bank, and federal law gives it a dual mandate: maximum employment and stable prices.1Board of Governors of the Federal Reserve System. What Economic Goals Does the Federal Reserve Seek to Achieve Through Its Monetary Policy? Those goals can conflict. Raising rates to slow price growth also slows hiring; keeping rates low to support jobs can let prices climb. Every rate decision balances the two.
The decisions themselves are made by the Federal Open Market Committee (FOMC), a twelve-member body made up of the seven-member Board of Governors and five rotating regional Reserve Bank presidents. The committee meets eight times a year to review data and set the direction of interest rates.2Federal Reserve Bank of Minneapolis. Monetary Policy Regional presidents bring information from manufacturing, agriculture, and consumer spending in their districts, which shapes how the committee reads national price trends.3Federal Reserve Board. The Fed Explained – Who We Are
In January 2012 the FOMC formally adopted a 2 percent annual inflation target, measured by the Personal Consumption Expenditures (PCE) price index rather than the more familiar Consumer Price Index. The PCE captures a broader picture of household spending, including costs paid on your behalf through employer health plans and programs like Medicare, and its formula reflects consumers switching to cheaper alternatives when prices rise.4BLS.gov. Differences Between the Consumer Price Index and the Personal Consumption Expenditures Price Index The target is a long-run average, not a ceiling; the Fed tolerates short stretches above or below.5The Fed. Why Does the Federal Reserve Aim for Inflation of 2 Percent Over the Longer Run? As of early 2026, year-over-year PCE inflation sits near 2.6 percent, and the federal funds rate target range is 3.5 to 3.75 percent.
Why the Fed Operates Independently
The Fed is structured to resist short-term political pressure. Governors serve staggered 14-year terms, and the president can only remove them for serious misconduct, not for policy disagreements.6Federal Reserve Board. Board of Governors of the Federal Reserve System The Fed also does not depend on congressional appropriations. Its income comes mainly from interest on the government securities it holds, with any surplus returned to the Treasury. That financial independence lets rate-setters make choices that may be unpopular in an election year but sound for long-run price stability.
The Tools the Fed Uses to Move Prices
The Fed does not set retail prices. It changes the cost and supply of money in the banking system, and those changes work their way through mortgages, credit cards, auto loans, and business financing until they slow or speed up spending.
The Federal Funds Rate
The federal funds rate is what banks charge each other for overnight loans, and the FOMC sets a target range for it at each meeting.7Federal Reserve. Economy at a Glance – Policy Rate A higher target range makes borrowing more expensive across the economy, which cools spending and eases price pressure. A lower range does the opposite.
To hold the federal funds rate inside the target range, the Fed relies on the Interest on Reserve Balances (IORB) rate, which is what it pays banks on money they keep at the central bank. Banks will not lend to each other for less than they can earn risk-free from the Fed, so the IORB rate effectively sets a floor under short-term interest rates. Overnight reverse repurchase agreements reinforce that floor for a wider group of financial institutions.8Federal Reserve Board. Interest on Reserve Balances (IORB) Frequently Asked Questions
Open Market Operations and the Balance Sheet
The Fed buys and sells Treasury securities in the open market to adjust the amount of money in the banking system.9eCFR. 12 CFR Part 270 – Open Market Operations of Federal Reserve Banks Selling securities pulls cash out; buying pushes cash in.
In severe downturns the FOMC scales this up by purchasing large amounts of longer-term securities, a strategy commonly called quantitative easing. That pushes down long-term interest rates when short-term rates are already near zero.10Board of Governors of the Federal Reserve System. The Central Bank Balance-Sheet Trilemma The reverse process, quantitative tightening, lets those securities mature without replacement, shrinking the balance sheet and pulling money out of circulation. The Fed began its most recent round of balance sheet reduction in June 2022 and concluded it on December 1, 2025.
The Discount Window and Reserve Requirements
The discount window lets banks borrow directly from the Fed at a rate set above the federal funds rate. The current discount rate is 3.75 percent, and it acts as a soft ceiling on overnight borrowing costs because banks generally will not pay more than that to borrow from each other.
Reserve requirements, once a central tool, are currently inactive. The Fed cut all reserve requirement ratios to zero in March 2020 and has not reinstated them.11Federal Reserve Board. Reserve Requirements The Fed retains authority to reimpose them under 12 U.S.C. § 461, but in today’s system the IORB rate has replaced reserve ratios as the main lever on bank lending.12Office of the Law Revision Counsel. 12 USC 461 – Reserve Requirements
Rate Changes Take Time
None of these tools work instantly. Full effects on inflation take roughly 18 to 24 months to appear in price data. Research from the Federal Reserve Bank of San Francisco estimates that four years after a 1 percentage point increase in the federal funds rate, overall prices are about 2.5 percent lower than they would have been otherwise.13San Francisco Fed (Federal Reserve Bank of San Francisco). How Quickly Do Prices Respond to Monetary Policy The FOMC has to act on where it expects inflation to be a year or two ahead, not just where it is today. That lag is also why the other actors described below matter: they can move faster than monetary policy in some situations, or push against it in others.
What Congress Controls
The Constitution grants Congress the power to tax and spend, and both directly affect prices.14Legal Information Institute. Article I – U.S. Constitution – Section 8 Higher taxes pull money out of household and business budgets, reducing demand. Tax cuts leave more money to spend, which can push prices up if the economy is already running hot. Spending works the same way in reverse: large appropriations for infrastructure, defense, or benefits inject money into the economy, and when that spending outpaces what the economy can produce, more dollars chase the same goods and prices climb.
Automatic Stabilizers
Some fiscal effects work without a vote. As incomes rise in a strong economy, people move into higher tax brackets and pay more, pulling spending power out automatically. At the same time, fewer people qualify for unemployment insurance and food assistance, so transfer payments drop. When the economy slows, tax collections fall and benefit enrollments rise, feeding money back in. These built-in features cushion both inflationary booms and slumps without new legislation.
Oversight of the Fed
Congress does not vote on interest rates, but it wrote the law that created the Fed and can rewrite it. The Full Employment and Balanced Growth Act of 1978, commonly called the Humphrey-Hawkins Act, requires the Fed Chair to deliver semi-annual reports and testimony to Congress on monetary policy and the economy.15Federal Reserve Board. Humphrey Hawkins Testimony and Report to the Congress If lawmakers conclude the Fed’s framework is not doing the job, they can amend the Federal Reserve Act or adjust its mandate.
What the President Controls
The president does not set interest rates, but the executive branch shapes inflation through several channels.
Fed Appointments
The president nominates all seven members of the Board of Governors, including the Chair and Vice Chair, subject to Senate confirmation. Governors serve 14-year terms; the Chair and Vice Chair serve renewable four-year terms.6Federal Reserve Board. Board of Governors of the Federal Reserve System Choosing who runs the Fed sets the philosophical direction of monetary policy for years beyond any single administration.
The Budget Proposal
Each year the president submits a budget to Congress laying out spending priorities and revenue expectations. Congress ultimately controls the purse, but the president’s proposal frames the negotiation.16The White House. Section 10 – Overview of the Budget Process A deficit-reduction budget tends to ease price pressure by reducing government-driven demand; a budget that expands programs or cuts taxes adds to it.
Tariffs and Trade Policy
Executive orders give the president significant power over trade policy, which directly affects the prices you pay for imported goods.17The White House. Continuing the Suspension of Duty-Free De Minimis Treatment for All Countries Tariffs are taxes on foreign imports, and the cost is often passed through to retail prices. Research from the Federal Reserve Bank of New York has found that tariff costs frequently fall on importers and, by extension, on domestic consumers, though foreign exporters sometimes absorb part of the increase by cutting their prices.18Liberty Street Economics. Who Is Paying for the 2025 U.S. Tariffs? Executive orders can also address supply-side pressures by adjusting regulations on energy, transportation, and manufacturing, which affects production costs.
The Council of Economic Advisers
The Employment Act of 1946 created the Council of Economic Advisers within the Executive Office of the President. The three-member body gathers economic data, monitors trends affecting price stability, and recommends policies to maintain purchasing power and full employment.19Office of the Law Revision Counsel. 15 USC 1023 – Council of Economic Advisers The CEA has no direct policy authority, but its analysis feeds the president’s decisions on budgets, trade, and regulation.
The Treasury’s Narrower Role
The Treasury Department contributes on the international side. Under the Omnibus Trade and Competitiveness Act of 1988 and the Trade Facilitation and Trade Enforcement Act of 2015, Treasury monitors whether major trading partners manipulate their currencies for trade advantage. When a foreign government artificially weakens its currency, its exports become cheaper in the U.S. market, which distorts competition and affects domestic prices.20U.S. Department of the Treasury. Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States – January 2026 Report Treasury publishes a semi-annual report to Congress on these practices, and its findings can trigger enhanced diplomatic engagement or trade responses that ripple through import prices.
Put together, controlling inflation in the U.S. is a shared responsibility with a clear lead. The Fed carries the primary tools and does most of the work through interest rate policy. Congress and the president decide how much money flows into the economy through fiscal and trade policy, and their choices can either reinforce or work against what the Fed is trying to do.