What is the Fed and How Does it Affect U?
We at UMe want U to be in the know as much as possible – because we believe that knowing sets U up for success! Lately, there has been lots of chatter about the Fed and the current rate environment. So, in our latest blog post, we’re giving you a brief overview of the Fed and how it works!
“The Fed” is short for the Federal Reserve System (A.K.A. the Federal Reserve). It is the United States’ central banking system. It was created in 1913 following a financial crisis as a way to help keep the economy healthy, ensuring the stability and reliability of our country’s financial system. The Federal Reserve System is made up of different components, such as the Board of Governors (which are the central authority that oversees the entire system and makes important policy decisions), the Federal Open Market Committee (FOMC), and twelve regional Federal Reserve Banks across the country.
What does the Fed actually do?
The Fed’s core responsibilities include setting interest rates, managing the money supply, and regulating financial markets. It also acts as a lender of last resort during periods of economic crisis (like in 2008 and again during the COVID-19 pandemic).
The Fed oversees the country’s monetary policy. This involves controlling the money supply and interest rates. Its purpose is to maintain financial stability in the U.S., aiming for high employment levels and price stability. Additionally, the Fed supervises and regulates banks to protect both the financial system and consumers’ rights.
In simpler terms, The Fed is like a finance boss that takes care of the country’s money. It decides how much money should be available (ie. the Fed makes our money and puts it into circulation) and how much people have to pay when they borrow money (ie. Interest Rates). The Fed is also one of several banking regulatory authorities. They regulate state-chartered member banks, bank holding companies, foreign branches of U.S. national and state member banks, Edge Act Corporations, and state-chartered U.S. branches and agencies of foreign banks.
Note: UMe Federal Credit Union is a federally chartered Credit Union and is regulated by the NCUA (National Credit Union Association), in case you’re curious.
So basically, the Fed wants to make sure that (1) the money system is strong and (2) lots of people have jobs and (3) things don’t cost too much.
How does the Fed do that?
The Fed monitors various economic indicators like unemployment, consumer prices, and GDP* to ensure the economy stays on track. They have a few strategies to influence the economy, such as setting interest rates. Lower rates make borrowing easier and encourage spending, while higher rates can cool off inflation. The Fed also manages the money supply by creating or destroying dollars digitally, and they use a strategy called quantitative easing to boost credit availability during economic struggles.
The Fed is like a guardian that watches important things to make sure our country’s money is doing well. They look at data like how many people have jobs, how much things cost, and how much money we all make. If things are going along steadily, they can make it easier for people to borrow money and buy things. But if things are going too fast, they can make it harder to borrow money to help slow things down. The Fed also makes more money or takes some away to help keep the economy going when it may not be doing well.
Note: *GDP stands for Gross Domestic Product. Think of GDP as a ruler that measures how much stuff a country makes and/or does in a year. It helps us understand if the country’s economy is doing well or not. We use GDP to compare different countries and see who is making more things and growing faster. It’s like a special number that tells us how healthy a country’s money and businesses are.
How does the Fed affect my daily life?
While U can’t control the Fed’s next moves, U can make smart financial decisions based on what they do! When the Fed lowers interest rates, it can be cheaper to buy property like a house or pay off your debts. But when they raise rates, it’s a good idea to focus on paying off debts — and quickly. Sometimes, the Fed’s actions can make investors worry, and it can be a bit of a roller coaster ride for the stock market. But if you prioritize your long-term goals, you can stay on track with your money plans. So, pay attention to what the Fed is doing so you can adjust your financial activities, if necessary.
Here are the Fed’s main responsibilities:
- Monetary Policy: One of the Fed’s key roles is to make and carry out monetary policy. This involves managing the amount of money circulating in the economy, setting interest rates, and striving for goals like low unemployment and stable prices.
- Supervision and Regulation: The Fed oversees and regulates banks and other financial institutions. It establishes rules and guidelines to ensure that these institutions operate safely and responsibly. This helps protect consumers and maintain the overall stability of the financial system.
- Financial Services: The Fed provides important financial services to banks, the U.S. government, and foreign institutions. For example, it operates the payment system, clears checks, and facilitates electronic transfers of funds.
- Financial Stability: The Fed keeps an eye on potential risks to the stability of the financial system. It conducts research, collects data, and works with other regulatory agencies to identify and address any threats that could harm the economy.
It’s worth noting that the Federal Reserve operates independently from the federal government. This independence helps ensure that monetary policy decisions are based on long-term economic stability rather than short-term political considerations.
And there U have it, we hope this information about the Fed and how it affects U has been helpful — because U matter to Me, to all of us, at UMe! You can learn more about the Fed on their official website, here.
Disclaimer: U matter to Me (all of us) at UMe — and that’s why we do our best to deliver helpful information on our blog. Please note the following: (1) UMe Credit Union works hard to make certain that the information we post here is as accurate as humanly possible. But as you know, information can change and evolve quickly. While we try to update the blog on a regular basis, the content of some older posts may not be correct or up-to-date. (2) Some destinations on the World Wide Web that we link you to will exist on external websites. UMe Credit Union does not officially endorse any connected sites, nor do/did we compensate or get compensated by any entities to be featured in our posts (unless otherwise noted). (3) Everyone’s situation is unique and we advise you to consult with our personal bankers or your finance, tax, or legal professional for advice individualized to you!