What is the Federal Reserve and how does it impact you?

You’ve probably seen headlines like “The Fed cuts rates to lowest level in three years” or “Will The Fed raise rates?” But unless you’re deep in the world of finance, it can all sound like background noise.

So let’s break it down. What is the Federal Reserve (aka “the Fed”)? Why do they get to determine interest rates? And how does any of this actually affect your money?

What is the Federal Reserve?

The Federal Reserve is the central bank of the United States. It was created back in 1913 to help keep the economy stable and functioning.

You can think of the Fed as the referee of the U.S. economy. It doesn’t make the rules (that’s Congress), but it does try to keep the game running smoothly by doing three big things:

1. Controlling inflation – making sure prices don’t rise too fast.
2. Promoting jobs – helping the economy grow in a way that keeps people employed.
3. Keeping the financial system stable – preventing things like bank runs and major meltdowns.

To do that, the Fed adjusts something called the federal funds rate. That’s the short-term interest rate banks use to lend money to each other. When the Fed changes this rate, it sets off a chain reaction across the entire economy, and your credit card, mortgage, and savings account all feel it.

How the Fed’s meetings work, and how they make decisions

The Federal Reserve has a committee called the Federal Open Market Committee (or FOMC), which is made up of 12 members. These members meet eight times a year to review the economy and decide whether to raise, lower, or hold interest rates steady.

Here’s how it works:

• If inflation is high and the economy’s running hot, the Fed might raise rates to cool things down.
• If the economy is slowing and people are struggling to borrow or spend, the Fed might cut rates to stimulate activity.
• If things are fairly balanced, the Fed might hold rates steady while watching what happens next.

These decisions are based on a wealth of economic data: job reports, inflation numbers, consumer spending, global events, and even bank stability and housing demand.

Once the FOMC votes, they publish a statement, and the Fed Chair (currently Jerome Powell) holds a press conference. That’s when you’ll start seeing headlines like “The Fed cut rates again.”

These meetings are a big deal because markets often react immediately.

How the Fed’s actions impact you

When the Fed raises or lowers interest rates, it can directly influence your budget, your debt, and your savings strategy. That’s why even a 0.25% rate difference makes headline news.

For example, here’s what typically happens when the Fed raises rates (and what you can do in response):

• Credit cards can get more expensive. Most cards have variable APRs tied to the prime rate, which climbs when the Fed raises rates. That means your balance gets costlier month by month.
  👉 What to do: Focus on paying down high-interest balances ASAP. If that’s not realistic, consider consolidating with a fixed-rate personal loan through Prosper* or a 0% intro APR balance transfer offer.
• Loans and mortgages cost more. From HELOCs to car loans to 30-year mortgages, higher rates can make new borrowing less affordable.
  👉 What to do: If you’ve already locked in a low fixed rate, you’re in a great spot. But if you’re thinking about taking out one of these loans and haven’t yet, start rate shopping now.
• Savings accounts may pay more. When the Fed raises rates, it’s great news for savers because it means banks may be willing to increase APYs on high-yield savings accounts and CDs.
  👉 What to do: If you don’t already have a high-yield savings account, now is the perfect time to make the switch. Many online banks have savings accounts that pay APYs of 4% or more. This is way more than you’ll earn with a traditional savings account, which earns 0.4% on average. 
• Your budget may feel tighter. If you’re making payments on variable-rate debt (like credit cards or some HELOCs), those monthly costs could eat into what you’re able to save or spend.
  👉 What to do: Audit your expenses. Build or rebuild your emergency fund. Look for areas to cut back, especially on nonessentials.

On the flip side, when the Fed cuts rates, this could happen:

• Borrowing could get cheaper. Personal loans, auto loans, and mortgages could have lower starting interest rates for new customers. 
  👉 What to do: If you’ve been putting off a big purchase, this could be a chance to borrow more affordably — but only if it fits your goals and budget.
• Debt payments may decrease. Variable-rate debts like credit cards or adjustable-rate mortgages might have lower interest rates, which in turn, can make your monthly payments smaller. 
  👉 What to do: Keep your payments the same if you can — you’ll make faster progress and save more on interest. These extra payments will also lower your debt-to-income ratio, which looks better to lenders when you need to borrow again.
• Savings yields decline. The APY on your savings account or money market account might drop. 
  👉 What to do: Consider locking in a higher yield with a CD if you won’t need the money soon. Just be careful about early withdrawal penalties.

Bottom line for your finances

Just because interest rates are rising (or falling) doesn’t mean you need to rush into action.

For example, say you’re worried rates will climb, so you consider taking out a loan “just in case.” But unless you truly need that money to consolidate high-interest debt* or cover a big upcoming expense, taking out a loan early could just mean paying interest on money you didn’t need yet. In fact, avoiding impulse purchases (like taking out loans you don’t need) is one of many habits of debt-free people.

The key is to stay aware of what the Fed is doing, but act when it makes the most sense for you.

If you do need to borrow, a fixed-rate personal loan through a platform like Prosper* could give you predictable monthly payments with no surprises if rates rise later. That way you avoid costly financial mistakes.

TL;DR: What is the Federal Reserve?

The Fed may feel like some institution whose decisions don’t impact you. But at least eight times a year (at those FOMC meetings), its actions can ripple into everything from your savings account yield to your credit card interest rate.

But while it’s smart to keep an eye on what the Fed is doing, the most important thing is making money decisions that work for you. Timing the market rarely beats trusting your own priorities and planning ahead.

*All personal loans made by WebBank.