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You, Your Financial Well-Being and the Federal Reserve


What does the rate change mean to your financial well-being? Is there anything you should "do" to your investment portfolio in response? We typically recommend you remain informed – but you act only on factors you can expect to manage within your personal investing. This is nearly always the case for economic events and other breaking news over which we have no control.

In that context, let's take a moment to share some insights about the Federal Reserve funds rate.

What Is the Federal Reserve?

As described on its consumer education site, the Federal Reserve is the central bank of the U.S. It was created by Congress as an independent government agency in 1913 "to provide the nation with a safer, more flexible, and more stable monetary and financial system."

Jerome Powell is its current board of governors' chair. He and his board are based in Washington, DC. They also oversee 12 regional reserve branches across the country and are tasked with three main roles:

  1. Monetary Policy – Promoting "maximum employment, stable prices and moderate long-term interest rates"
  3. Financial Services – Serving as a bank for U.S. banks as well as for the country's monetary operations – issuing currency, managing the government's bank accounts, borrowing money in the form of U.S. Savings bonds and more

What Is Going On?


The Federal Reserve sets monetary policy through its Federal Open Market Committee (FOMC), which includes the Fed's board members and a rotating representation of Reserve Bank presidents.


While the FOMC has a number of ways to seek balance among the competing demands of the economy, raising or lowering the federal funds rate has long been one of its more powerful management tools. So, it's no wonder the question can grab everyone's attention whenever the FOMC is set to meet. It's also no wonder that investors are bombarded with the usual volume of conflicting coverage on what is and is not at stake, and what may or may not come to pass. Depending on who you heed, lower or higher federal funds rates can be anything from a panacea, to a global scourge, to a non-event in the markets.

What Does All This Mean to You and Your Money?

First, it helps to understand that there is an intricate interplay between nations' monetary policies, global interest rates and the markets in general. Anyone who claims to know exactly what will happen in one arena when we pull a lever in another had best be able to present a functioning crystal ball to be believed.

To cite one example, consider this March 2018 column by Wall Street Journal columnist Jason Zweig, in which he chastises various brokers for their still-anemic sweep account yields despite then-rising interest rates. At the time, he observed: "The Federal Reserve has driven short-term interest rates up a full percentage point since late 2016; one-month Treasury bills were yielding 1.6% this week. But you'd never know any of that from looking at the returns on the cash in your brokerage account."


Why is there often a disconnect? It's partly the result of those multiple global factors at play, with the Fed's actions representing only one among many others. A post by "The Grumpy Economist" John Cochrane even suggests that the Fed's actions may be one of the less-significant factors involved: "Lots of deposits (saving) and a dearth of demand for investment (borrowing) drives (real) interest rates down, and there is not a whole lot the Fed can do about that. Except to see the parade going by, grab a flag, jump in front and pretend to be in charge."

What Should You Do?

Whenever you're wondering how best to respond to a shifting landscape such as that wrought by falling (or rising) interest rates, begin by asking yourself: What can I do about it?

Unless you are Fed chair Jerome Powell, there is probably nothing you can do to personally influence what the Fed's decisions will be, or how the global markets are going to respond to them. But there is plenty you can do to help or harm your own wealth interests.



