The Federal Reserve and the economy
This data brief for Congress summarizes the Federal Reserve’s role in the economy, the tools it uses to carry out monetary policy, and recent trends in inflation and employment that shape those policy decisions.
Updated March 24, 2026
Federal Reserve (Fed) chair Jerome Powell’s term will end in May 2026. As the Senate considers President Trump’s nominee to replace him, questions are naturally arising about the Federal Reserve’s role, how it functions, and its effect on the economy, prices, and the workforce.
The Federal Reserve raised interest rates and reduced its balance sheet to slow prices from creeping upward after the pandemic’s economic disruptions and the subsequent surge in inflation.
More recently, the Fed has begun changing policy as labor market conditions softens and inflation slows. The Fed lowered the federal funds target rate three times in 2025. It also began expanding its balance sheet after a reduction period of more than two years.
This brief summarizes the Federal Reserve’s role in the economy, the tools it uses to carry out monetary policy, and recent trends in inflation and employment that shape those policy decisions.
Data summary
- Inflation has slowed but has still been above the Fed’s target of 2% since 2021. The Fed’s preferred inflation metric, the Personal Consumption Expenditures price index, averaged about 2.9% in 2025. As of January 2026, it was 2.8%.
- The unemployment rate rose to an average of 4.3% in 2025, a second consecutive annual increase, though it remained below long-term historical averages. Unemployment was 4.4% in February 2026.
- The employment-to-population ratio for adults ages 25 to 54 has fallen from recent historic highs. It averaged 80.6% in 2025, about one percentage point below its 2000 peak. That was the first time it had declined since 2020.
- The Federal Reserve began easing monetary policy in 2025 due to slowing inflation and a softening labor market. The Fed lowered the federal funds target range three times, bringing it to 3.5% to 3.75%. It began expanding its balance sheet in mid-December after reducing it from March 2023 through early December 2025.
Keep exploring
- What is the Federal Reserve? - Established in 1913, the Federal Reserve serves as the nation’s central bank, directing monetary policy and supporting financial stability.
- What the Personal Consumption Expenditures Index (PCE) says about the US - Closely monitored by the Federal Reserve, personal consumption expenditures are an economic indicator that provide greater insight into how Americans earn, save, and spend.
- What is inflation and how is it measured? - One of the most common economic indicators helps contextualize how much a dollar can buy.
- Are groceries more expensive than last year? - Grocery store food prices increased 2.1% from January 2025 to January 2026 – the product with the biggest jump, ground beef, went up more than 21%.