What the Federal Reserve is
The Federal Reserve System — “the Fed” — is the central bank of the United States, created by the Federal Reserve Act of 1913. It is structured as a board of governors in Washington plus twelve regional Reserve Banks. Unlike the Bank of England’s single inflation focus, the Fed operates under a dual mandate: to promote maximum employment and stable prices, the latter defined as 2% inflation measured by the PCE price index.
The FOMC and the federal funds rate
US interest-rate policy is set by the Federal Open Market Committee (FOMC), which meets eight times a year and sets a target range for the federal funds rate. Each meeting brings a statement, and four times a year a “dot plot” showing where each official expects rates to go, plus a press conference from the Fed Chair. Markets parse every word: because the dollar sits on one side of the vast majority of global FX trades, an FOMC surprise moves not just GBP/USD but currencies, bonds and equities worldwide.
How the Fed drives GBP/USD
GBP/USD is a contest between the pound and the dollar, so the Fed is one half of the story even on a UK-quiet day. A hawkish Fed — raising rates, or signalling higher-for-longer — tends to strengthen the dollar and push Cable down. A dovish Fed tends to do the opposite. The cleanest way to think about it is the gap between Fed and Bank of England policy: widening in the dollar’s favour pressures GBP/USD lower; widening in the pound’s favour supports it.
The dollar’s special role
Because the dollar is the global reserve and safe-haven currency, the Fed’s influence extends far beyond US borders. In times of stress, investors buy dollars and US Treasuries regardless of the source of the shock, which is why GBP/USD can fall on bad news that has nothing to do with the UK. See the US dollar profile for more on this.