The Federal Reserve — commonly called the Fed — is the central bank of the United States. It controls monetary policy, regulates banks, and works to keep the economy stable. Decisions made at Fed meetings can affect your mortgage rate, savings account yield, and the job market within months.
Related: What Is Mortgage Recasting?
What the Fed Does
Sets Interest Rates
The most visible function. The Fed sets the federal funds rate — the overnight interest rate that banks charge each other to lend money. When the Fed raises this rate, borrowing gets more expensive across the economy. When it cuts, borrowing gets cheaper.
Controls the Money Supply
The Fed can expand or contract the money supply through open market operations — buying or selling government securities. Buying securities puts money into the banking system; selling takes money out.
Supervises Banks
The Fed regulates and supervises many U.S. banks to ensure they are operating safely and following laws. This helps protect depositors and prevent financial crises.
Lender of Last Resort
During financial crises, the Fed can lend money to banks that cannot borrow elsewhere, preventing bank runs and system-wide collapses.
The Fed’s Dual Mandate
Congress gave the Fed two main goals: maximum employment and stable prices (low inflation). These goals often compete. To fight inflation, the Fed raises rates — which slows the economy and can cost jobs. To boost employment, it may cut rates — which can fuel inflation. Balancing the two is the core challenge of monetary policy.
How Fed Decisions Affect Your Finances
- Mortgages: When the Fed raises rates, mortgage rates rise. A 1% rate increase on a $400,000 loan adds roughly $250/month to your payment.
- Savings accounts: Higher Fed rates mean banks pay more interest on savings accounts and CDs. This is good for savers.
- Credit cards: Most credit card APRs are variable and tied to the prime rate, which moves with the Fed rate. A higher rate means more expensive revolving debt.
- Stock market: Rate changes affect stock valuations. Rate hikes often pressure stock prices; rate cuts tend to support them.
- The job market: Fed policy influences economic growth, which affects hiring and wages.
The Federal Open Market Committee (FOMC)
The FOMC is the Fed committee that sets the federal funds rate. It meets 8 times per year. These meetings and the resulting statements are closely watched by markets and the financial press.
Bottom Line
The Fed operates largely in the background, but its decisions ripple through every aspect of the financial system. Knowing how it works helps you anticipate how economic shifts might affect your borrowing costs, savings returns, and investment portfolio.