We hear frequent references to the Federal Reserve (“the Fed”) in the news, but the way it affects our lives seems a bit cloudy. So, let’s clear the air.

The Federal Reserve, our nation’s central bank, has a fair degree of independence, but it is directly accountable to Congress. Among its primary duties, is to oversee U.S. banking and financial services industries and establish U.S. monetary policy. Here are five ways the Fed impacts us.

#1 – Sets interest rates for mortgages & loans
One of the key monetary policy functions of the Federal Reserve’s Open Market Committee is to set the Federal Funds interest rate. This is a rate charged when banks borrow and lend funds from one another. That does not directly determine what banks and other institutions will charge for consumer loans like mortgages or auto financing, but it does have an indirect impact. If the Fed is lowering or raising interest rates, a similar trend is likely to follow for other types of borrowing.

#2 – Changes in your cost of living
One of the mandates of the Federal Reserve is to try to manage the inflation rate. The level of change in the cost of living from year to year can have a major impact on your bottom line. The Fed seeks to keep the annual inflation rate at 2 percent or less. It has generally succeeded in maintaining that level in recent years. But it structures monetary policy to respond to current economic conditions in order to keep the inflation rate in check.

#3 – The employment environment
Another of the Fed’s mandates is to maintain what is referred to as “full employment,” an environment where most who are seeking work can find it. The Fed tries to accomplish this by managing monetary policy to create favorable conditions so employers can hire more workers. This mandate has to be balanced with the desire to maintain a modest rate of inflation.

#4 – Short-term investment performance
Again, the Fed does not have any direct impact on investment markets, but its monetary policy stances, including interest rate policies, are closely watched, particularly by investment professionals. Stock and bond markets can fluctuate depending on expectations of Fed actions or specific policies it implements.

#5 – Earnings on bank savings
Banks will often adjust the rates they pay for Certificates of Deposit (CDs) or interest-bearing accounts based on the Fed’s interest rate policy. Yields will improve when the Fed is raising short-term interest rates, but decline if the Fed decides to cut rates.

To determine your financial position in light of the current state of the Fed’s policies, it may make sense to sit down with a financial advisor and review your portfolio.

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Michael W. K. Yee, CFP®, CFS®, CLTC, CRPC ®, is a Private Wealth Advisor, Certified Financial Planner ™ practitioner with Ameriprise Financial Services, Inc. in Honolulu, HI. He specializes in fee-based financial planning and asset management strategies and has been in practice for 32 years. Investment advisory products and services are made available through Ameriprise Financial Services, Inc., a registered investment adviser. Ameriprise Financial Services, Inc. Member FINRA and SIPC. ©2019 Ameriprise Financial, Inc. All rights reserved.