If you've been watching the news over the last year or so, surely you have heard more and more about the Fed. The Fed has been a frequent target of President Trump, who has been adamant about his desire for lower interest rates.
So what exactly is the Fed? The Federal Reserve System was created by the Federal Reserve Act in 1913. The goal of the Fed is to achieve full employment, while also maintaining price stability. By price stability, we are referring to keeping inflation to moderate levels. The Fed has a chairman - currently Jerome Powell. The Fed chairman is appointed by the President, and Mr. Powell’s term ends in May of 2026. At that time President Trump will get to identify a new nominee, who must then be confirmed by the Senate.
There are some misconceptions out there about the role of the chairman. Some people have suggested that a new Fed chairman will immediately implement President Trump’s preferred monetary policy with significant rate cuts. It is important to note that the rate policy is decided by the Federal Open Market Committee (FOMC), and the chairman is just one of the 12 votes in that committee. So while a new chairman will have impact and influence, the chairman is not a unilateral determinator of monetary policy.
https://www.federalreserve.gov/aboutthefed/fedexplained/who-we-are.htm
There is also the 7 member Board of Governors. Each member of the Board of Governors is appointed to a 14 year term, and they are staggered for one term to expire each two years. That prevents any one president from being able to replace all of the board of governors in order to help maintain political independence of the Fed.
https://www.stlouisfed.org/in-plain-english/federal-reserve-board-of-governors
So what does the Fed do that directly impacts you? One key mechanism the Fed uses to influence the economy is by setting the Federal Funds Rate, a key short term interest rate. The Fed has cut this short-term interest rate a couple times this year. When the FOMC changes short term interest rates, consumers see a quick impact in things like credit card interest rates, Home Equity Line of Credit rates, as well as the interest that banks pay on your cash deposits. Another misconception about the Fed, their actions do not directly dictate what interest rate you get on your next mortgage. Mortgage rates may trend directionally with Fed policy, but they are actually based on US Treasury Bond yields. See the link below from Fannie Mae for more information on how that works:
https://www.fanniemae.com/research-and-insights/publications/housing-insights/rate-30-year-mortgage
Don’t Fight the Fed is a common saying in financial markets, because they do have a broad impact on the US economy. We certainly pay attention to what the Fed is doing as we consider how to position our client's portfolios. Hopefully the next time you hear about the Fed in the news you will feel a little more informed on who they are and what they do.
We hope you all have a wonderful Thanksgiving!
Anders, Kurt, Maggie and Molly