Jul 21, 2025
Whether you follow financial news closely or not, you’ve likely heard a lot about the Federal Reserve—or “the Fed”—in recent years. But what does the Federal Reserve do? And why does it matter for the average American?
To put it as simply as possible, it’s a bank run by the United States government. There is a reserve bank president and a federal reserve board, just as you’d have with other financial service institutions. And as the country’s reserve bank, its choices or monetary policy make their way from the federal government and into your daily life in a lot of ways.
To go a little deeper, the Federal Reserve System is the central bank of the United States and has many functions, including supervising and regulating financial institutions, as well as conducting national monetary policy. But the reason you’ve most likely heard about the Fed has to do with interest rates. The Fed sets the target interbank interest rate, also called the “federal funds rate.”
Changes in the federal funds rate determine what banks charge to borrow money from each other. And what a bank pays to borrow from another institution affects what it charges a consumer to borrow from the bank. So, when the Fed changes the target federal funds rate, your everyday bills and finances can be affected.
Read on to learn more about the Federal Reserve System, its role in the economy, plus how changes in the federal funds rate can impact the cost of living and more.
Congress passed the Federal Reserve Act in 1913 to support a safer and more stable economy after several banking crises. The law established the Federal Reserve System that same year as an independent body to protect the nation from these times of financial crisis.
The Federal Reserve Act sets out three primary goals for the Federal Reserve System: maximum employment, stable prices, and moderate long-term interest rates.
The Federal Reserve System is made up of three main elements: the Board of Governors, 12 regional reserve banks, and the Federal Open Market Committee (FOMC), which consists of members of the Board of Governors and Reserve Bank presidents. This committee is the body that sets the target federal funds rate.
The Federal Reserve System is responsible for five key functions.
First, and most notably, the Fed sets national monetary policy for the United States. Monetary policy refers to the tools and strategies that a nation’s central bank uses to promote economic growth and support a stable economy. In this function, the bank aims for the goals of maximum employment and stable prices.
The Fed is also responsible for promoting the stability of the financial system, the safety and soundness of financial institutions, consumer protection and community development, and for fostering safe and efficient payment and settlement systems. Basically, the Fed oversees our financial system and how it impacts everything from the individual bank, commercial banks, and consumers.
To do this, it monitors many factors to evaluate the health of the financial system. The money supply is all of the United States government money that is currently in circulation, including cash, coins, and bank account balances. The Federal Reserve also maintains and evaluates a balance sheet that includes federal reserve balances (the accounts that commercial banks hold at the Federal Reserve), U.S. Treasury securities, and currency in circulation.
The Federal Open Market Committee is made up of 12 members: seven members of the Federal Reserve System Board of Governors, the president of the Federal Reserve Bank of New York, and a rotating group of four out of the 11 other Reserve Bank presidents from member banks across the country.
The Federal Open Market Committee meets eight times each calendar year. During these meetings, the committee reviews economic and financial conditions. They then make monetary policy decisions, such as adjusting the target federal funds rate.
After each meeting, the Federal Open Market Committee releases a statement to summarize the Committee’s policy decision and the economic outlook. In addition, the Chairman of the Federal Reserve Board, currently Jerome Powell, speaks to the press explaining the reserve bank’s latest monetary policy strategy and give an assessment of the economy.
When the Federal Open Market Commitee decides to change the federal funds rate, other rates may be affected right away—including short-term interest rates, foreign exchange rates, and long-term interest rates.
Eventually, other economic indicators will likely be impacted too. The prices of consumer goods and services can rise or fall based on bank rates, because they change the financial outlook of the companies making and selling those goods, as well as the buying power of consumers. Plus, because interest and exchange rates have an impact on company finances, employment levels may also be affected by changes in monetary policy from the Federal Reserve.
The federal funds rate is the rate at which banks in the U.S. lend to each other. When the news reports that the Fed has raised or lowered interest rates, they are talking about the federal funds rate.
Raising and lowering the federal funds rate is the main tool that fed officials have to impact the United States economy. There are a few ways that this plays out, related to the Federal Reserve System’s primary goals of high employment and stable prices.
Changing the federal funds rate can help regulate the nation's employment levels because companies will make hiring decisions based on their financial outlook and employees may feel more or less confident looking for new jobs in certain economic conditions. It also stabilizes prices because changing the federal funds rate can lead to changes in interest rates that affect consumer buying power.
For instance, when the Fed raises the federal funds rate, one goal is to make it more expensive to borrow money, which means people will likely decrease spending on goods and services. As a result, less money is exchanged between consumers and businesses. The economy slows down, and because there is lower consumer demand, the price of goods and services should decrease. This is also how the Fed tries to control interest rates.
Inflation rates are one of the key concerns of the Fed. High inflation rates result in higher prices for essential products and services, such as food, energy, and housing. Lowering inflation is one of the main reasons why the Federal Open Market Committee raises the federal funds rate.
Over the past few years, the central bank has made multiple adjustments to the federal funds rate, affecting the overall economy and the financial situation of consumers.
After the pandemic led to a global recession in 2020, the Fed lowered the federal funds rate to 0%.1 This boosted the economy because people could borrow more cheaply, helping spend more in general and especially on major financed purchases like cars and houses.
However, these low rates, combined with government stimulus money sent to American households, increased demand dramatically. That caused a jump in consumer prices and created worries about inflation.
After two years at some of the lowest rates in federal reserve history, the central bank raised the federal funds rate seven times in 2022 to slow the economy. In the same way that lowering interest rates may result in more consumer spending, raising the interest rate might reduce spending as people will borrow less and feel like they have less disposable income.
The Fed continued to raise the federal funds rate until July 2023, when it set the target range to between 5.25% and 5.5%—its most recent high. In September 2024, the Federal Reserve cut the rate for the first time since 20202, one of three consecutive cuts before most recently keeping the rate unchanged at between 4.25% and 4.5% in March 2025.3
The Fed’s monetary policy actions are intended to keep inflation at about 2% while also trying to balance the economy’s health and keeping employment high. Obviously, that means their decisions will impact your shopping costs and your job security, but the Federal Reserve System can also affect your personal finances in other ways.
When the Fed raises the target federal funds rate, it becomes more expensive for banks to borrow money. As a result, commercial banks typically raise the interest they charge to consumers, which can lead to a decrease in consumer lending. In other words, it may be harder to get a loan or credit card. Or the interest rates on credit cards and loans might be less advantageous for you. This is how the decisions made at the top of our financial system trickle down to your wallet.
Federal Reserve Bank monetary policy and interest rate fluctuations can eventually affect mortgages, car loans, lines of credit, and credit card interest rates.
For example, when rates rise, payments on variable rate bills like credit cards could increase. This is one reason why consolidating higher-interest, variable rate debt with a fixed-rate loan at a lower interest rate may be a good idea when you plan your budget, particularly if long term interest rates are high or just volatile.
On the other hand, during times when federal rates are trending downward and you can get a lower interest rate, maybe you look to lock in a fixed-rate loan to consolidate debt or make a big purchase you want to pay back over time.
While interest rates are a key piece of shopping for a loan, it’s also important to look at all the details of any type of loan you’re considering. Some lenders may charge additional fees, such as lender fees or prepayment penalties, that can change the total cost of your loan. However, lenders have to tell you all the costs and fees that factor into the annual percentage rate (APR).
To make sure you know the impact that both interest rates and APR can have on your wallet, it’s a good idea to review both when you are comparing loans.
During times where interest rates are higher, consumers can earn more by placing money into savings accounts. Consumers can choose different savings account options, such as high-yield savings accounts that can earn more interest than regular savings accounts.
Cryptocurrency has been one of the most-debated financial topics of the past few years. This form of digital money is managed by computer networks rather than traditional financial institutions and is not backed by any government. Since the Fed regulates banks and the U.S. dollar, cryptocurrencies are not fully regulated as part of the Federal Reserve System. But as the Fed pushes for stricter oversight, its authority over the growing cryptocurrency industry may eventually increase.
You don’t have to track the Fed’s every action and meeting, but for all the trickle-down reasons we’ve discussed it’s smart to keep tabs on what the reserve bank is doing.
For example, because the cost of borrowing is affected by the federal funds rate, it can be helpful to check in on the Fed if you’re planning to make a major financial decision soon. Depending on the current central bank rate, the cost of a loan you take out to buy a house or make home improvements could be impacted.
So while you shouldn’t worry about keeping up with every Fed meeting, you can stay informed about what it is doing to rates and how that could impact your finances.
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For more detailed information, visit https://www.federalreserve.gov/monetarypolicy/fomc.htm
