Wednesday, October 28, 2015

Behind the mystery: What the Fed does, and why

The Federal Reserve building in Washington, D.C. plays host to FOMC meetings.

Confused by what exactly the Federal Reserve does and what it all means? You're not alone.

Yet decisions made by the Federal Open Market Committee on when to raise, lower or leave interest rates unchanged affect every consumer, every business and every transaction made in the United States. The Fed's impact is like water or air, seeping into everything.

The Fed committee meets once every six weeks to vote on whether to adjust the central bank's interest rates or leave them unchanged, based on a variety of economic factors and trends. When interest rates are raised, the cost of taking on any new credit rises for borrowers or businesses, along with it slightly higher risk.

When interest rates are lowered, it makes borrowing money more attractive to consumers and businesses because the cost and risk is also lowered. Lower interest rates have the effect of stimulating economic growth: This is the key reason Fed officials have kept interest rates low since the beginning of the Great Recession.

The big question now is when the Federal Reserve policymakers will ultimately decide the economy is ready to sustain rate increases. It was widely speculated that such a change would come earlier this year - it hasn't yet, due to fears of untimely negative consequences on economic recovery.

The FOMC meeting ending today resulted in no changes, as expected. However, by the next Fed meeting coming up in December, committee members might finally decide it's time for a change.

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