Twelve people in a room set a number that moves your rent, your savings and every crypto market on earth.
The short answer
The Fed does not set interest rates by decree — it makes cash scarce or plentiful until banks charge the rate it wants.
Think of it as
You do not set the temperature of a room. You set a target, and the machine adds or removes heat until the room agrees.
The machine
Step by step
The Federal Open Market Committee meets eight times a year with one job Congress gave it: maximum employment and stable prices. Inflation running hot argues for higher rates. Unemployment rising argues for lower. Usually the two argue with each other.
The committee votes on a target range for the federal funds rate — say 4.25% to 4.50%. That is the rate banks charge each other to borrow overnight. The Fed does not command it; it announces where it wants it to land.
To push the rate up, the New York desk sells Treasuries and drains reserves out of the banking system. Scarce reserves cost more to borrow. To push the rate down, it buys, and reserves become plentiful and cheap.
The overnight rate is the base cost of money for a bank. Every loan it writes is priced above it. Mortgages, car loans, credit cards and corporate debt move within weeks.
An asset is worth the cash it will produce, discounted back to today. Raise the discount rate and every future dollar is worth less now. Long-dated and speculative assets fall hardest.
When Treasuries pay 5%, a stablecoin paying nothing is a bad deal — and issuers holding those Treasuries earn the spread. Lending rates across DeFi must clear the risk-free rate or the capital leaves.
Rate changes reach the real economy with a lag of six to eighteen months. The Fed is steering by a thermometer that reports the past, which is why it overshoots in both directions.
Look closer
It starts as a vote. Twelve people, one range, eight times a year.
Try it
At a 4.5% fed funds rate, that mortgage costs about $1,597 a month.
Check yourself
What does the Fed actually announce?
How does it push the rate up?
Why do high Treasury yields pressure DeFi?
In one picture
A vote sets a target, bond trading makes cash scarce or cheap, and every price in the economy follows — months later.
StableMoney