JUN · ISSUE 27 · July 1, 2026
CONCEPTWhat the Federal Reserve actually does
It doesn't print money on a whim or steer the stock market. It chases two goals and moves the price of money to hit them.
JOB 1
Prices
stable inflation
JOB 2
Jobs
the most possible
LEVER
Rates
the price of money
THE IDEA
Dual mandate
stable prices + maximum employment
The Federal Reserve is the central bank of the United States. By law it pursues two things at once: prices that rise slowly and steadily, and the highest possible level of employment. Almost everything it does makes sense once you picture that two-pan balance.
THE NUMBER
SIMPLE RULE2
2
goals the Fed balances at once
Picture a thermostat with two sensors: one reads prices, the other reads jobs. The Fed nudges rates up or down so neither one runs away.
Two goals, almost always in tension. Cooling inflation tends to chill employment, and protecting jobs can stoke inflation.
- INFLATION
- — The pace at which prices rise. The Fed aims for near 2% a year.
- RATES
- — The interest the Fed sets. It's the base price of money in the economy.
TO GET IT
THE KEYThe Fed doesn't move stocks, it moves the price of money
“A central bank doesn't set the price of stocks. It sets the cost of borrowing. Everything else, mortgages, equities, and savings, follows behind.”
When money is cheap, people borrow, spend, and invest. When it's expensive, they hold back. Stocks only react afterward.
- CREDIT
- — Borrowed money paid back with interest.
- MONETARY POLICY
- — The central bank's decisions on rates and liquidity.
THE CYCLE
HOW IT ACTSThe pendulum of rates across a cycle
When inflation runs hot, the Fed hikes. When jobs weaken, it cuts. The cycle repeats. Illustrative curve.
Illustrative curve, not real data. The Fed raises rates to cool inflation and cuts them to revive jobs. It's a pendulum.
- RESTRICTIVE
- — High rates that slow credit and cool the economy.
- EXPANSION
- — A growth phase with low rates and cheap credit.
TOOLS
THREE LEVERSHow the Fed moves the economy
INTEREST RATES
Its main tool. It hikes to cool prices and cuts to spur spending and jobs. This is the base price of money.
BALANCE SHEET (QE AND QT)
It buys bonds to inject money (QE) or lets them mature to drain it (QT). That tunes the system's liquidity without touching rates.
WORDS (FORWARD GUIDANCE)
Sometimes just announcing its intent is enough. The market moves on the verbal steer alone, before any real decision.
It doesn't have a single lever. It has three, and it mixes them depending on what prices and jobs are doing.
- QE
- — Quantitative easing: the Fed buys bonds and injects liquidity.
- QT
- — Quantitative tightening: the Fed drains liquidity from the system.
- FORWARD GUIDANCE
- — Steering market expectations by signaling intentions.
COMPOSITION
WEIGHT OF EACH LEVERHow much each tool weighs
The main, most direct lever
Tunes the system's liquidity
Moves expectations with words alone
How much banks must hold back
If you remember only one, make it the first: rates are the thermostat for the price of money. Illustrative split.
An illustrative split of each lever's relative power. Rates are, by far, the one that moves the real economy most.
- LIQUIDITY
- — How much money is available and easy to move in the system.
- RESERVES
- — The money banks are required to keep set aside.
IN PRACTICE
WHAT REACTSFive assets that move with the Fed
| TLT | ~89 | ▲ up if cuts | Long-dated US bonds. Their price rises when the Fed eases rates. |
| SHY | ~82 | → steady | Short US bonds. They track the Fed's policy rate very closely. |
| SPY | ~740 | → depends on path | S&P 500. It likes cheap money; it suffers when rates climb. |
| GLD | ~370 | ▲ up if reals fall | Gold. It shines when real rates fall and the dollar weakens. |
| UUP | ~28 | ▲ up if rates rise | Dollar index. It strengthens when the Fed holds rates high. |
When the Fed shifts course, these five feel it first. Indicative levels, no day prices.
- ETF
- — A listed basket that tracks an index or group of assets.
- REAL RATE
- — The interest rate after subtracting inflation.
WRAP
FOLLOW USClear on what the Fed does now?
Next time you hear 'whatever the Fed decides', you know where to look: the balance of prices against jobs.
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- DUAL MANDATE
- — Stable prices and maximum employment, the Fed's two goals.
- RATES
- — The base price of money the central bank sets.