How The Federal Reserve Affects Your Finances

roll of american dollars tightened with red band

In this time of economic uncertainty and rumors of a looming recession, everyone should be paying attention to what the U.S. government is doing. Any and every action taken by this group directly and indirectly affects the wealth of its citizens. Something you should be concerned about. I am not referring to a potential increase in taxes, but rather something much more ominous. I’m referring to the Federal Reserve’s current inability to control inflation. Here’s how the Federal Reserve affects your finances.

Who Is The Federal Reserve?

The Federal Reserve (Fed) is the central banking system of the U.S. Established in 1913, the Fed’s primary responsibility is to promote maximum employment and price stability. This is commonly referred to as the “dual mandate.” Maximum employment is measured using the unemployment rate, while price stability is measured using the inflation rate. The Feder Reserve system consists of a central governing board, 12 Reserve Banks located throughout the U.S. and the Federal Open Market Committee (FOMC). It is important to note that the Federal Reserve is an independent government agency. So, while it is in frequent communication with the President and congress, decisions are made independently.


How the Federal Reserve Affects Your Finances


Higher Mortgage Rates

While the Fed does not control mortgage rates, its decision influences mortgage rates. The Fed influences the increase/decrease of mortgage rates when it increases or decreases the Federal Funds Rate. This is the rate at which depository institutions lend to and borrow from each other. The FOMC sets this target rate. Previously mortgage rates were at historic lows, however, that changed when the Fed started increasing the Federal Funds Rate. Now mortgage rates are climbing thus increasing the cost consumers pay for their homes.

Higher Loan Rates

crop businessman giving contract to woman to sign. How The Federal Reserve Affects Your Finance
Photo by Andrea Piacquadio on

To curb inflation, the Fed has engaged in strategies to restrict money supply. This includes increasing the target Federal Funds Rate. Fed action such as this causes a ripple effect throughout the credit industry resulting in higher loan rates. Loans affected include car loans, personal loans, and student loans. This not only makes it harder for consumers to get these loans but also makes the loans more expensive.

Higher Market Volatility

Have you checked your portfolio lately? Well, you might not want to. All three major indexes, S&P 500 Dow Jones and NASDAQ, are all trending down year-to-date. The reason for this is traders are predicting a recession partly because of the Fed’s current struggle to curb inflation. Traders have begun moving their money from risk assets, such as stocks, to safer assets, such as bonds. When there are more traders willing to sell their stocks than those willing to buy, the price of the stock falls. If you are investing in individual stocks, or even an indexed mutual fund, then you’ll see the value of your portfolio fall also.

If you are a long-term investor, then at present you should be seeking opportunities to buy value at a cheaper cost. However, if you are strapped for cash or retiring you may have to accept your losses.

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Every person living in the U.S. should be interested in how the Federal Reserve affects their finances. The actions of this government agency can inhibit you from achieving your financial goals.


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Published by Nicole

Certified Internal Auditor

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