The Optimal Interest Rate for the Federal Reserve to Target: What the Law Requires

Last reviewed: October 3, 2026. This article is general information, not legal or financial advice. The Fed's rate decisions change at each meeting; check the Federal Reserve's own pages for the current target range.

People argue about the "right" interest rate all the time: savers want higher rates, borrowers and home buyers want lower ones, and politicians often have strong views too. It helps to know that this isn't just a matter of opinion. Congress wrote the Fed's job into law, and that legal mandate is the yardstick every rate decision is measured against.

Short answer: no law tells the Federal Reserve what interest rate to target. The Federal Reserve Act sets three goals instead: maximum employment, stable prices and moderate long-term interest rates. The Federal Open Market Committee (FOMC) decides the target range for the federal funds rate at each meeting, using its own 2% inflation goal as the guide for "stable prices." So the "optimal" rate is a judgment the FOMC makes, meeting by meeting, about what best serves that mandate.

The legal mandate in plain English

The three goals in § 225a are often shortened to the "dual mandate," because the Fed treats maximum employment and stable prices as its two main targets. Moderate long-term interest rates are expected to follow if prices stay stable.

• Maximum employment. The FOMC describes this as the highest level of employment the economy can sustain while prices stay stable. It says it cannot set a fixed number for this, because the maximum level of employment "is not directly measurable and changes over time."
• Stable prices. Here the FOMC has picked a number. In its Statement on Longer-Run Goals and Monetary Policy Strategy, it says that "inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory maximum employment and price stability mandates."
• Moderate long-term interest rates. This goal is not a target for the overnight rate the Fed sets. It refers to longer-term rates, such as those on mortgages and bonds, which are shaped by markets as well as by the Fed.

The 2% goal is worth understanding properly: it is the Fed's own reading of the law, not something Congress wrote. The statement was first adopted in 2012, and the current version was reaffirmed effective January 27, 2026. The FOMC says it reviews these principles each January and carries out a broader public review of its strategy roughly every five years.

How the FOMC actually sets the rate

The rate you hear about in the news is the federal funds rate, which the Fed describes as the rate at which banks and other depository institutions lend balances to each other overnight. The FOMC's statement calls changes to the target range for this rate its "primary means of adjusting the stance of monetary policy."

• Who decides. Under 12 U.S.C. § 263, the FOMC is made up of the Board of Governors plus five representatives of the Federal Reserve Banks. In practice that means twelve voters: the seven governors, the president of the New York Fed, and four of the other eleven Reserve Bank presidents, who rotate.
• When. The FOMC holds eight regularly scheduled meetings a year. It publishes a statement after each decision, and minutes of regular meetings are released three weeks after the decision.
• How it weighs the goals. When the two goals pull in different directions (for example, high inflation and rising unemployment at the same time), the FOMC says it follows a "balanced approach," looking at how far each is from its goal and how long each is expected to take to get back.

So when commentators argue that the Fed should raise or cut rates, they are really arguing about which of the legal goals is further off track right now, and how fast the Fed should react.

Who holds the Fed accountable?

The Fed is designed to be independent in day-to-day policy, but it is not unaccountable.

• Congress. Under 12 U.S.C. § 225b, the Fed Chair must appear before the House and Senate banking committees at semiannual hearings, and the Board must submit a written report on monetary policy and the economy at the same time. Congress can also amend the Federal Reserve Act itself.
• Fixed terms for governors. Under 12 U.S.C. § 242, each governor serves a 14-year term "unless sooner removed for cause by the President." The Chair serves a four-year term as Chair.
• The courts. In Trump v. Cook (decided June 29, 2026), the Supreme Court denied the Government's request to let the President's attempted removal of Governor Lisa Cook take effect while her lawsuit continues. The Court said "cause" sets "a substantial threshold," that the President had not given her the notice and opportunity to respond that the statute requires, and that "Not only the fact of independence but also the appearance of independence is key to the Federal Reserve's design." It did not decide whether cause exists in her case; that depends on facts still to be determined.

The practical point is that the people who set interest rates cannot simply be replaced because someone dislikes a rate decision. The Government in Cook itself accepted that the removal protection rules out removal for policy disagreement.

What this means for you

• Rates move with the mandate. If inflation is well above 2%, the "stable prices" goal pushes toward higher rates; if unemployment is rising and inflation is near the goal, it pushes toward cuts.
• Check the source. The Fed posts every target range change and every FOMC statement on its own website. That is more reliable than headlines or social media predictions.
• Your own loan follows your contract. A Fed decision changes the federal funds rate, not your existing fixed-rate mortgage. Variable-rate debts, such as many credit cards and home equity lines, can move with it, depending on the terms you signed.

Sources

• 12 U.S.C. § 225a, Maintenance of long run growth of monetary and credit aggregates: Cornell LII
• 12 U.S.C. § 225b, Appearances before and reports to the Congress: Cornell LII
• 12 U.S.C. § 242, Terms of office of Board members: Cornell LII
• 12 U.S.C. § 263, Federal Open Market Committee: Cornell LII
• FOMC, Statement on Longer-Run Goals and Monetary Policy Strategy (reaffirmed effective January 27, 2026): federalreserve.gov (PDF)
• Federal Reserve, What economic goals does the Federal Reserve seek to achieve through its monetary policy?: federalreserve.gov
• Federal Reserve, Federal Open Market Committee: federalreserve.gov
• Federal Reserve, Meeting calendars, statements and minutes: federalreserve.gov
• Federal Reserve, Open market operations (target range history): federalreserve.gov
• Trump v. Cook, No. 25A312 (U.S. June 29, 2026): supremecourt.gov (PDF)