Yes, the Fed matters to you

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After raising federal interest rates for the third consecutive quarter in June, Federal Reserve Chairperson Janet Yellen held off on another one Wednesday. But the Fed will, she’s hinted, do it again before the year ends — probably in September.

Is that good or bad? What does it mean for average folk? What is the Federal Reserve Bank anyway?

It’s not a bank in the usual sense; you can’t open a checking account there. Think of the Federal Reserve (a.k.a., “the Fed”) as the government’s bank, and the banks’ bank — those are the Fed’s two customers. But the Fed’s better known for setting U.S. monetary policy (don’t confuse that with fiscal policy, which is a government’s tax and spending decisions). The Fed also regulate U.S. financial institutions, indirectly serving the rest of us.

Created under the Wilson administration in 1913, the Federal Reserve is an independent system of 12 regional banks, with four basic functions:

1. Set monetary policy — such as raising or lowering interest rates and selling bonds — to stabilize the economy and pricing, and maximize employment (rapidly rising wages are a concern). By measuring inflation and making credit cheaper or more expensive, for example, they can affect how much money is changing hands, and how the economy grows.

2. Supervise and regulate financial institutions, and protect consumers.

3. Maintain the whole financial system’s stability, and contain risk.

4. Act as the federal government’s bank (including dealing with foreign financial institutions), and provide services to American banks. In this way banks and the U.S. government are customers like us, making (reserve) deposits and borrowing money.

The Fed doesn’t just control the rate at which it lends to banks; it also sets the rate at which they lend to one another. As banks’ borrowing costs go up or down, they pass that on to us. So as the Federal Reserve’s interest rates continue to increase (albeit by small increments), savers will slowly earn a little more. Meanwhile, carrying credit card balances and borrowing (especially short-term, such as auto loans) will likely get more expensive.

The Federal Reserve’s policy-setting group meets eight times a year, and tends to cut rates or leave them alone when the economy is bad or slow, and raise them when it’s growing, like now. Financial experts noted that at the start of 2017, the economy was already growing at the highest rate it can reasonably sustain.

All that monetary power could be manipulated. Moreover, the effects of monetary policy changes take longer than two-, four-, or six-year terms of office, so the beauty of this system is that it’s designed to be apolitical. The Federal Reserve Board and staff are independent, carefully transparent, and while they regularly make status reports to Congress, neither Congress nor the president sets their policies.

I’m no financial expert, and there’s much more to the Federal Reserve picture. Start at the comprehensive source with


Sholeh Patrick, J.D. is a columnist for the Hagadone News Network. Contact her at

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