Why the Federal Reserve’s decisions matter to you
Home ownership. Retirement. Saving for college. Those are what you might call personal finance dreams. But guess what? Big picture policy decisions shape how you pay for those things. You may have heard about the nomination process for the next Federal Reserve chair. Ben Bernanke’s been the chairman since 2006 and his term expires in January. The debate over who should replace him has been messy. So why does that job matter? The Federal Reserve can make a big difference in your financial life, according to Ann Owen, an economics professor at Hamilton College and former economist at the Federal Reserve Board of Governors.
“For example, the Fed influences interest rates. And those interest rates can influence loan rates that people pay, can influence whether or not it’s a good idea to refinance your mortgage, it can influence rates of return you might be getting on savings,” says Owen.
Owen says one way to think about the interest rate is to think of it as the price of money.
“Basically what the Fed is doing is they’re putting a very large supply of money out in the economy. And when you have a large supply, it lowers the price. So it lowers the interest rate,” says Owen. “What the Federal Reserve is actively doing is try to keep interest rates low — especially right now, mortgage rates. And the reason why they want to do that is because they want to keep housing prices increasing because that’s generally good for the economy.”
One term that you might have heard thrown around this week is quantitative easing (watch an explainer in the video above). That’s the technical term for the Federal Reserve’s policy of buying bonds and other assets in order to push more money into the economy. “That will lower loans for things like houses and cars and other types of long-term purchases that people make,” says Owen.
Explore more of our coverage on the Federal Reserve:
- Federal Reserve confounds the economic forecasters
- Tapering? The Fed says, not so fast
- Surprise! Fed torpedoes the taper, for now
- Bernanke’s taper — that wasn’t
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