"The Fed" and How it Impacts You
If you've been keeping up with news stories about the economy lately, you may have heard that "the Fed" has been raising rates, and is likely to do so more often in the future. What does this mean, and how will it impact you? Do you know what the Fed is and how it influences your money? Learning a bit more about how the central bank of the United States works and how it can impact your finances can help you make long-term plans for big financial decisions.
What is "the Fed"?
The Federal Reserve is the central bank of the United States. It is owned by private banks and operates independently of the U.S. government; it is not a government agency, though its Board of Governors are appointed by the President. The Fed has three mandates: maximize employment, stabilize prices and moderate long-term interest rates.
What does it do?
The main way the Fed accomplishes its three mandates is by raising or lowering the Federal Funds Interest Rate (the basis for most other interest rates). In general, when the Fed lowers interest rates, the goal is to stimulate the economy. Conversely, they usually raise rates when they want to slow down the economy and/or control inflation.
Does the Fed Funds rate impact me?
Yes. Even though consumers do not directly borrow money from the Fed, the banks that provide their car loans and mortgages do. Since the Fed Funds rate is the basis for other rates (by being the cost of what your bank must pay in order to get money) raising and lowering it affects the rates you, the consumer, can get from your bank. So, if you're in the market to buy a house and you hear that the Fed may be raising interest rates soon, you know to act quickly so you can secure a lower interest rate for your mortgage.
So are high rates bad?
No. While low interest rates on large purchases like homes are good for consumers, extended low interest rates (like we've seen over the past 10 years) means that the economy isn't growing very fast and consumers aren't earning much on their savings. When the Fed Funds rate goes up, depositors see increased interest rates on their savings accounts and CDs, so higher rates are a bonus for savers. It's also important to note the Fed raises rates a little at a time (usually only 0.25%) and the higher rates only affect new loans and loans with adjustable rate terms. Higher rates also mean the FOMC sees signs that the economy is getting stronger, which is good for everyone.
By keeping these basic concepts in mind, consumers can create a better financial plan for themselves. Be sure to speak with your local banker if you want to learn more about the Fed. They'll be able to offer specific advice according to your accounts and circumstances.