While the Federal Reserve can’t directly set interest rates on all loans, they do set the price of borrowing money in the U.S. by adjusting the federal funds rate. Banks are required to keep a minimum balance in their federal reserves, but when they can’t meet those minimums, they borrow from one another. The federal funds rate is the interest banks have to pay each other to borrow money to maintain their federal reserve funds minimum balance. Because this rate dictates how expensive it is for banks to borrow from one another, it indirectly affects interest rates across the board.
