In 2022, in attempts to stop runaway inflation, the Federal Reserve increased Federal Funds rate 7 times increasing rates a total of 4.25%. This is perhaps one of the most aggressive increases in recent history, but what does it mean for you? Let’s take a little look at how the Federal Reserve works and how the process of monetary control affects you.
Despite what the name may suggest, the Federal Reserve or “The Fed” is not a part of any government. Rather, it is an independent central bank that serves our country. Most countries have a similar central bank that controls the money system for their country. Our own central bank was approved by Congress under The Federal Reserve Act of 1913, and it was signed into law by Woodrow Wilson. Although is not part of the government and operates primarily independently of federal government, it is overseen by the board of governors, a group chosen by the President of the United States and approved by Congress.
The job of the Fed is to serve as the bank to retail banks assisting in the movement of money in the US and beyond. It is broken into 12 Federal Reserve Districts that cover different areas of the country. District Federal Reserve branches are the bank at the top of the system that includes your local bank or credit union. Your bank uses the Fed to obtain money for lending and for the process of clearing transactions.
The Fed also controls the US’s money supply through monetary policy. Think of monetary policy like a big dam. Money sits in the reservoir behind the dam and The Fed allows for money to run down the dam structure and down the river to you and me. When the Fed uses loose monetary policy, there is more money flowing down the line and when they are tightening monetary policy, they are holding more in the reservoir. Different monetary control styles are used during different times as the economy moves through different phases of the economic cycle.
2022’s Fed rate hikes are an example of tightening monetary control. One of the more noticeable effects of the 2022 Fed rate hikes was the quick changes to the real estate market. Rate hikes caused an increase of activity as buyers became fearful that rising rates would make payments less affordable. The flurry of activity quickly gave way to a slowdown as some buyers either edged out of the marketplace or decided to hold off. Money became more expensive to borrow keeping more of it in the reservoir.
You may have felt frustrated if you have ever been trying to make a major purchase during the recent rising interest rates, but there are other things at play during changes in monetary control. Ultimately, 2022’s rate hikes were aimed at lowering the unstainable inflation which affects the prices of everything we buy. Although it is unlikely to quickly bring the price of your eggs and milk down, the hope is that we would see prices begin to stabilize, a return to a more normal inflation rate.
There are two sides to the coin when it comes to monetary policy. While borrowers began to see the effects of higher interest rates, those saving also did. For the first time in a long time, rates on savings accounts, CDs and bonds began to climb. As rates continue to climb, it is expected that fixed rates will be beneficial to people wanting to save. This can be a welcome sight for those savers who are becoming exhausted from the rocky market conditions that existed throughout the year 2022.
Though you may give little thought to the Federal Reserve and how it works, it affects how you transact, spend, and save. By understanding a little about what the Fed’s role in our economy is, you can better understand what risks and opportunities are available for you because of the Fed.
If you would like to discuss how recent how recent changes in interest rates have affected your financial situation, please feel free to contact our team for a complimentary consultation. We have experienced financial advisors located in Eau Claire, La Crosse, and Green Bay.
Investment Advisor Representative
Rebecca joined the firm in 2011 as an Investment Advisor Representative. In this role, she works with clients to manage their investment assets and help them obtain their financial objectives. Rebecca brings a great deal of experience to the team having worked for several years at Marshall & IIsley Bank and MetLife. She earned a Masters of Business Administration degree (with an emphasis on finance) from Concordia University.