Updated: Sep 10, 2023

How Federal Reserve Policy Could Affect Your Next Big Purchase

Find out how the Federal Reserve policy could affect your next big purchase and what you should look out for.
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Whoever said “You can’t fight City Hall” wasn’t thinking big enough. That person should have been saying “You can’t fight the Fed."

janet yellen image
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The Fed is shorthand for The Federal Reserve, and if you don’t know what it is or exactly what it does, you better learn fast because it is one of the most powerful institutions in the world when it comes to your money and what you pay for anything and everything. If you don’t think so, just take out a bill from your wallet and right there before your eyes, above the dignified image of George, Abe, Alexander, Andrew, Ulysses or everybody’s favorite, Benjamin, (he of the $100 bill) are three words all in stoutly capitalized letters: “FEDERAL RESERVE NOTE.”

Indeed, if you have upcoming plans to finance a car, a home, a two-week vacation or a hip replacement, you need to become an astute observer of Federal Reserve policy.

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Shrouded in mystery

If the Fed is one of the world’s most powerful institutions, by extension, you would assume that the Fed chair should be one of the most powerful people in the world, and you’d be right. Yet when President Obama introduced Janet Yellen as the Fed’s new chair on Feb. 3, 2014, he observed that few Americans know what the chair does or the vital role the Fed plays in the American and world economies and your wallet, in particular.

Part of this Fed’s Sphinx-like demeanor is how it is structured. The Federal Reserve comprises a 12-member Federal Open Market Committee that meets eight times a year, but it is hardly an “open” committee because the members meet in secrecy. After each meeting, the Fed chair summarizes the committee’s economic outlook, but the Fed waits three weeks before dribbling out the full minutes from the meeting, providing ample time for the media and Fed watchers alike to speculate, sometimes parsing every word and facial nuance, on the future direction of rates.

Furthermore, although the Fed chair is just one vote out of a dozen, the Fed chair has a storied history of reining in disagreements. The Fed is not like the U.S. Supreme Court, which has a rich history of angry dissent, to the point that the Chief Justice could be of the minority opinion on an important decision being handed down. That doesn’t happen with the Fed.

Anyway, MyBankTracker will try to shed a little more light on Federal Reserve policy and exactly what it means for your money.

A little history, please

The Fed has now been around for a century. Actually, the U.S. Congress created the Fed on Dec. 23, 1913 (so happy belated birthday) to provide the nation with a safer, more flexible and more stable and monetary financial system. Legislation was a response to the seven economic “Panics” the United States had suffered since its founding. In fact, the Federal Reserve was born out of the 1913-1914 recession.

Essentially, the Fed was instructed to 1.) conduct monetary policy by influencing money and credit conditions; 2.) supervise and regulate banks and other financial institutions; 3.) maintain the stability of the financial system and contain systemic risk that may arise in financial markets; and 4.) provide certain financial services to the U.S. government, U.S. financial institutions, and foreign financial official institutions, and play a major role in operating and overseeing the nation’s payments systems.

In the wake of the 2008 Great Recession, Congress broadened the powers of the Fed to reduce turmoil in the financial markets, and the Fed, per its charter and mission, took full advantage of this newly invested power and authority. Not only did it continue to micromanage interest rates, primarily by lowering the Fed funds rate (the rate at which banks loan money overnight to one another to make up for short-term funding gaps), but it went on an unprecedented buying spree, gobbling up U.S. Treasury Bonds and mortgage-backed securities (MBS), which are closely tied to Treasuries.

The Fed’s massive easy-money stimulus, referred to as quantitative easing or QE, kept a tight lid on rising rates. In fact, by mid-summer, mortgage rates tied to the 30-year bond hit their historic lows, great news for borrowers looking to buy or refinance.

So, the Fed was taking its order to conduct monetary policy by influencing money and credit very seriously. Although the Fed began tapering its massive stimulus at the start of this year, after a five-year buying binge, it is hardly surrendering control over your money. In fact, its influence has grown even more. The Fed doesn’t burp or sneeze without it fetching a hundred different comments.

Reading the tea leaves

Just like Wall Street companies, it’s no longer enough for the Fed to simply report the numbers. It has to interpret them and spin them. Federal Reserve policy is now all about providing “forward guidance.”

And therein lies the dangerous albeit necessary game of rate-watching. If the Fed projects the view that the economy is improving, more consumers (including shoppers hunting for homes and home loans) will become more confident buyers. Conversely, if the Fed takes a downbeat view of the economy, consumers will become more reluctant buyers. Too much confidence raises rates, too little lowers them.

After Fed chair Janet Yellen addressed central bankers at the annual Economic Policy Symposium in Jackson Hole, Wy., on Friday, Aug. 22, the yield on the the benchmark 10-year Treasury note -- used to calculate mortgage rates and other loans -- was flat at 2.41 percent.

Yellen achieved her “Goldilocks” moment. She had locked in the gold, neither superheating nor supercooling the market. She had not been overly optimistic or overly pessimistic about the future of the economy. She had excited some expectations about the future growth of the economy while dampening others.

As she exited the Jackson Hole stage -- if not the world stage as the United States is the world’s most robust economy -- the Great Rate Debate began anew about which course Federal Reserve policy would take. Some lending pundits jumped on the phone telling their clients to lock their mortgage rates; others advised floating (not locking) through the weekend on the hunch rates could fall.

After being given the weekend to fully digest and dissect every morsel of the Fed chair’s latest remarks, analysts will start the week trying to divine the next swing in Federal Reserve policy and the direction of interest rates, in particular.

One thing is certain, their eyes will be sharply focused on the chair of the Federal Reserve, the center of the rate-making universe.

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