It seems like every week there’s a headline about the president pressuring the Federal Reserve to lower interest rates—as if a rate cut would solve all our economic problems. While the Fed doesn’t hold all the power, it does have significant influence over the economy, with ripple effects felt around the globe.
At its core, the Federal Reserve is the central bank of the United States, established in 1913 with a dual mandate to promote economic stability and maximize employment. It was designed to operate independently from short-term political pressures, focusing instead on long-term economic health.
The Fed’s structure is decentralized, consisting of a seven-member Board of Governors, 12 regional Federal Reserve Banks that represent different parts of the country, and the Federal Open Market Committee (FOMC), which sets monetary policy. The FOMC includes all seven governors, the president of the Federal Reserve Bank of New York, and four of the remaining regional bank presidents (on a rotating basis).
One of the Fed’s key responsibilities is controlling inflation. It targets an inflation rate of 2%—low enough to avoid economic damage but high enough to support steady growth and job creation. When inflation rises too quickly, as it did in 2021–2022, the Fed steps in to slow the economy by raising interest rates.
But it’s not as simple as flipping a switch. The Fed influences monetary policy through three main tools: open market operations (buying and selling U.S. Treasury securities), the discount rate (what the Fed charges banks to borrow from it), and reserve requirements (the amount banks must keep on hand, currently set at zero).
The most visible lever is the federal funds rate—the benchmark rate for overnight interbank lending. This is the rate the media refers to when reporting on Fed decisions. Banks use this rate to determine what they will charge their customers for loans. When the Fed raises this rate, borrowing becomes more expensive. Corporations may scale back investments, slow hiring, or freeze wages. Consumers, feeling the pinch, may cut back on spending, slowing economic growth and easing inflation.
The impact trickles down gradually, indirectly influencing mortgage rates, credit card APRs, auto loans, and savings yields—but the effects aren’t immediate. Still, these decisions matter: when the Fed cuts rates, it signals concern about slowing growth and a desire to stimulate the economy.
We saw this play out in March 2022, when the Fed began raising rates to curb inflation. Critics argued the Fed acted too late, allowing inflation to persist longer than expected. When policy lags, the backlash comes from all sides—economists, investors, and yes, the president.
Today, some economists say the economy is slowing and question why rates haven’t been cut. Others argue the data doesn’t support that view. Meanwhile, President Trump has been vocal in urging Fed Chair Jerome Powell to lower rates. Any president would prefer lower interest rates to stimulate short-term economic growth, which can reflect positively during their term in office.
The Fed, however, is tasked with long-term thinking, often relying on economic reports, which are released with delay, including the Consumer and Producer Price indices, Personal Consumption Expenditures Price Index, unemployment rate, Gross Domestic Product, and housing data. It was built to be data-driven and independent—but lately, some critics argue it’s too focused on lagging data, not looking far enough ahead.
If you have questions on how the Fed’s decisions on interest rates may affect your investments, the experts at Henssler Financial will be glad to help:
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