I see some documentation saying that Federated is "everyone anyone in your instance follows" and some say that it's "the combined Local feeds of all instances your instance Federates with"
Which is it? Or am I misunderstanding completely.

@SkipSandwichDX

your instance has to be "aware" of it to show up in federated. so for it to exist in the federated timeline, someone on your instance is following someone there.

but it's not necessarily the local timeline of that instance.

@jackdaw_ruiz so it's just people that someone in my instance is following?

@SkipSandwichDX

the short answer is "yes".

the longer answer incorporates the possibility for other reasons your instance may still fetch those posts. like using "relays" that link instances without the organic process of people following each other.

i will say that as a persistent theme, the explanation of any functionality on the fediverse always has a longer answer with strange and conditional exceptions & caveats.