The Fed is changing its interest rates. Yeah… and Big Brother is watching.
The Fed—or the Federal Reserve—conveys a mysterious air. It’s as if the Fed manifests itself as the financially erudite cousin of Orwell’s omnipresent Big Brother: looming and ominous. But that may just be me (it’s probably just me).
We’ve all probably heard of the “Fed” at one point or another, but some of us might not know what exactly the Fed is. So, Quontic is doing a bit of unmasking—and it turns out that America’s central bank is not ominous at all. On the contrary, the Federal Reserve is crucial to our nation’s economic prosperity.
History
Before the Fed existed, the U.S. was in a volatile state of financial turmoil. Banks often didn’t have enough cash, and consumers often didn’t have enough confidence in banks to keep accounts with them. It was not uncommon for individuals to hastily withdraw their money from their account if they heard another bank failed.
Consequently, many banks went out of business, and a sort of banking hysteria seized America. So, to contend against paranoia and remedy banking failure, the Federal Reserve Act was forged in 1907.
The Federal Reserve as we know it was officially established on December 23, 1913, when the brush of President Woodrow Wilson’s pen ratified the Federal Reserve Act as law. This act established the Federal Reserve System as the central bank of the United States, intending to provide the nation with a safer, flexible, and stable financial system.
Function
Today, the Fed’s responsibilities are chalked up to four designations as outlined by Credit Karma:
- To enact monetary policies that promote high employment and low inflation
- To supervise and regulate financial institutions to fortify economic systems and protect consumers’ credit rights
- To provide payment to
- clear checks and process electronic payments
- maintain the Treasury Department’s checking account
- ensure that there’s an adequate supply of currency in circulation
- To manage day-to-day stability in our financial system
Rates
You might have heard of the financial adage “So goes the federal funds rate, so goes consumer interest rates.” But what does it mean?
According to Discover, when the Fed decreases its rates, borrowing is typically less expensive for consumers. When the Fed cuts rates, banks tend to lower their rates on credit products. Consumers will then pay less in interest for personal loans, home equity lines of credit, adjustable-rate mortgages, business loans, and credit cards.
However, when the Fed increases rates, savers cash in. Interest rates tend to rise for savings accounts, certificates of deposit, money market accounts, and interest-bearing checking accounts.
All in all, the banking rates we’re familiar with are contingent with the Federal Reserve’s rates and the way they fluctuate.
To Conclude
A lot of the Federal Reserve’s functions go unnoticed by the average layperson, which is why the “Fed” can seem a bit like an Orwellian convention: almost mythical and undoubtedly tremendous. But, in all actuality, the Federal Reserve plays a crucial role in borrowing, personal finance, and the overall health of our economy.
