Federal Reserve System: Meaning, 2026 Interest Rate Cycles, and Global Economic Impact

The Federal Reserve System is the central banking system of the United States, established in 1913. Its primary purpose is to provide the nation with a safe, flexible, and stable monetary and financial system. It operates independently within the government but is subject to oversight by Congress.

The Federal Reserve performs several critical functions, including:

• Implementing monetary policy: The Fed manages interest rates and controls the money supply to achieve stable prices, maximum employment, and moderate long-term interest rates.
• Supervising and regulating banks: It ensures the safety and soundness of the banking system and protects consumers’ credit rights.
• Maintaining financial stability: The Fed monitors and addresses risks to the financial system to prevent economic crises.
• Providing financial services: It facilitates payments and settlements for financial institutions, the US government, and foreign institutions.

The Federal Reserve’s decisions, particularly regarding interest rates, have a significant impact on global financial markets. Changes in the Fed’s policies can influence currency exchange rates, foreign investments, and economic growth in other countries, including India.

The Federal Reserve System is composed of three main components, each playing a unique role in its operation:

1. Board of Governors

The Board of Governors is a centralised governing body consisting of seven members appointed by the President of the United States and confirmed by the Senate. This board oversees the Federal Reserve System, sets monetary policy, and ensures the stability of the financial system.

2. 12 Regional Banks

The Federal Reserve System includes 12 regional banks located in major cities across the United States. These banks operate semi-independently and serve as the operational arms of the Federal Reserve. Each bank is responsible for a specific geographic area and provides services such as distributing currency, supervising banks, and conducting economic research. The 12 regional banks are located in:

• Boston
• New York
• Philadelphia
• Cleveland
• Richmond
• Atlanta
• Chicago
• St. Louis
• Minneapolis
• Kansas City
• Dallas
• San Francisco

3. Federal Open Market Committee (FOMC)

The FOMC is the policy-making body of the Federal Reserve that oversees open market operations, which involve the buying and selling of government securities. The committee consists of the Board of Governors and five regional bank presidents who rotate on a yearly basis. The FOMC’s primary responsibility is to set the federal funds rate, which influences interest rates across the economy.

The Federal Reserve’s FedNow service, launched in 2023, is a real-time payment system designed to enable instant money transfers between banks in the United States. Similarly, India’s Unified Payments Interface (UPI) has revolutionised digital payments, allowing seamless and instant transactions between bank accounts.

Key differences between FedNow and UPI

• Geographical scope: While FedNow is limited to the United States, UPI is widely used across India and is expanding to global markets through partnerships with other countries.
• Technology integration: UPI operates on a mobile-first approach, integrating with apps like Google Pay and PhonePe, whereas FedNow primarily targets bank-to-bank transfers.
• Policy goals: FedNow is part of the Federal Reserve’s broader strategy to modernise the US payment system, while UPI is an initiative by the Reserve Bank of India (RBI) to promote cashless transactions and financial inclusion.

Both systems have their unique strengths, but UPI’s widespread adoption and versatility make it a standout in the global payment ecosystem.