This week, the Federal Reserve announced a 25 basis-point reduction to the federal funds rate — its first rate cut of 2025. The Fed indicated that two more rate cuts may be on the table for 2025.

Rate cuts can be cause for celebration, particularly if you're planning to buy a home or pay off debt. But you can also expect to earn less interest on bank deposits and some investments. In other words, now is a good time to reevaluate where you keep your savings and look for ways to maximize your interest earnings.

Interest rate reductions have several implications when it comes to banking and borrowing money. Here's what you can expect after a rate cut from the Fed:

Loans: If you have a fixed-rate loan, nothing will change. However, if you want to take out a new mortgage or car loan, for example, or refinance an existing loan, the interest rates offered by lenders will be lower. As a result, it's more affordable to borrow money since you’ll accrue less interest — and monthly loan payments may be lower, too.

Bank accounts: The annual percentage yield (APY), or interest you earn on bank deposits, decreases. As a result, you'll earn less on the cash you keep in your checking and savings accounts.

Low-risk investing: If you already have an investment account that gives you guaranteed returns, such as a certificate of deposit (CD) or Treasury bill, your rate will stay the same. However, the rates offered on new accounts will begin dropping.

Being that this most recent Fed rate cut is a modest one, you may see gradual changes to your interest rates in the short term. However, more cuts are likely to come, so now is a great time to lock in high rates and prepare your next steps.

For your day-to-day cash and emergency savings, it's best to keep the money in the bank, since you need to maintain easy, penalty-free access to your funds.

But as banks reduce the interest rates offered on deposit accounts (which they can do at any time), your balances will earn less. As a result, you'll want to check the APY on your bank accounts and shop around to see if you can earn a higher rate elsewhere. Here are some bank accounts that might earn more than your regular checking or savings:

High-yield checking

High-yield savings

Online bank accounts

Read more: How do banks set their savings account interest rates?

When it comes to money you don't plan to use within the next few months, consider moving it out of your savings account and into a CD right away. By doing so, you could lock in around 4% APY or higher before rates take another hit.

In addition to comparing rates, look for CD accounts with longer terms, since the goal is to retain your high rate long past any future rate cuts.

This strategy is particularly useful for anyone who's been saving for a down payment on a home. By moving your savings into a CD, you can lock in a high APY while waiting for mortgage rates to drop. If you're not exactly sure when you'll need your money, you might also consider CD laddering, or opening up multiple CDs with staggered maturity dates.

Like CDs, Treasury bills are a good choice if you're saving up for a future expense and you want to lock in high rates before they start falling. At present, you can still get above 4% on some T-bill terms. However, the Fed's rate cut means these rates won't stay for long.

Before you buy a T-bill, compare the rates and terms with available CDs to see where you can maximize your earnings. And keep in mind that you don't have to pay state or local taxes on T-bill earnings.

Read more: CDs vs. Treasury bills: Which is best for maximizing your savings?

As rates fall, you'll have to increase your risk in order to maintain or beat what you've been earning on cash deposits and fixed-income assets. That means that when your current CDs, T-bills, and bonds mature, you may want to move the money to your stock portfolio.

While rate cuts tend to be good for the stock market, it's too soon to tell how it will respond over the coming months. In other words, some patience is required. But while you're waiting to see how the market stabilizes, some experts suggest investing in stocks that are more sensitive to rate cuts, such as real estate investment trusts (REITs) and small caps.

Read more: High-yield savings account vs. investing: Which is right for you?

You may not think much about the federal funds rate on a daily basis, but this key number impacts many areas of your financial life and the economy as a whole.

The Federal Reserve — the country’s central bank — periodically adjusts its target rate to keep the economy running smoothly and consumer prices in check. When the federal funds rate moves up or down, so do the interest rates on bank accounts and loans. In other words, changes in the Fed’s rate impact how much your savings can grow and how much you pay to borrow money.

So how does today’s federal funds rate compare to past years? Here’s a look at historical Fed interest rates so you can better understand how your bottom line is affected.

The federal funds rate is set by the Federal Reserve and dictates what a bank can charge another bank for ultra-short-term loans (usually overnight) in order to meet reserve requirements. It's expressed as a range, and financial institutions can negotiate a specific rate between each other within that range.

The Fed’s target rate also impacts the interest rates individual financial institutions set for financial products such as deposit accounts, bonds, loans, and credit cards.

Read more: Fed rate cut: How it affects your bank accounts, loans, credit cards, and investments

The federal funds rate soared in the early 1980s when inflation hit more than 13%, the highest level recorded. This marked the end of a macroeconomic period known as the “Great Inflation,” which economists believe was brought on by Federal Reserve policies that led to an overgrowth in the supply of money.

In response, the Fed raised interest rates, and the federal funds rate reached more than 19%.

In the late 1990s and into the early 2000s, there was another major economic shift when the Fed began bringing the federal funds rate down. This move was fueled by the dot-com bubble burst — a period of economic instability when investors poured capital into internet-based companies, which led to an overvaluation of many of these start-ups. Unfortunately, not all of these companies were profitable, and the fallout of this bubble burst led to many bankruptcies and a recession.

Then, following the terrorist attacks of Sept. 11, 2001, the Fed cut rates further due to widespread uncertainty and a slowdown in economic activity.

In 2007, the housing market crash prompted the Fed to once again lower its target rate to 2%. A series of rate cuts followed, eventually bringing the target range down to a range of 0%-0.25% — effectively zero — by December 2008.

As the economy recovered from the Great Recession, the Fed began slowly increasing rates again. But in 2020, the COVID-19 pandemic rocked the U.S. economy and brought about challenges such as supply-chain issues, reduced economic activity, and high unemployment. In March 2020, the Fed once again slashed rates to a range of 0%-0.25%.

Read more: How to recession-proof your savings

Beginning in 2022, the Fed pivoted sharply as inflation surged to a 40-year high. It raised the rate aggressively through 2022 and 2023, eventually peaking at 5.25%–5.5%, the highest level in over two decades. By late 2024, however, inflation had eased, and the Fed began gradually cutting rates again.

The target rate remained steady at 4.25%–4.5% until September 2025, when the Fed finally cut its rate again by 25 basis points. Now, it stands at a range of 4%- 4.25%.

“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook remains elevated. The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment have risen,” the Fed said in a statement explaining the decision.

The next Fed meeting is slated for October 28-29, 2025 when the Federal Open Market Committee (FOMC) will decide whether or not to further adjust the federal funds rate.

The Federal Reserve's latest "dot plot," which outlines policymakers' interest rate projections, now signals two additional rate cuts in 2025. That would bring the benchmark rate down to a range of 3.5-3.75% by the end of the year.

Even so, it's impossible to predict exactly how and when the Fed will cut rates in the future.

Read more: Why you should open a CD account before the Fed's next meeting

Following a series of cuts to the federal funds rate in late 2024, the Federal Reserve has since held its target rate steady despite pressure to make additional cuts in 2025.

Fed officials are adopting a cautious approach amid economic uncertainties, especially the impact of recent tariffs imposed by the Trump administration. They've emphasized the need for patience, suggesting that any rate changes should await clearer economic data.

However, President Trump has been vocal in his opposition to the Fed's decisions, to say the least. He described Fed Chair Jerome Powell as a "stubborn moron" after the Fed kept interest rates steady, urging for immediate cuts and suggesting the Fed board override Powell.

And on Monday, Trump took things even further, stating in a letter (which was subsequently shared on social media) that he removed Federal Reserve Governor Lisa Cook from her post — a move that critics say is illegal.

So, how much influence does the sitting president really have over Fed leadership and its monetary policy decisions? Here’s what you need to know.

Read more: 5 ways to tariff-proof your finances

The Federal Reserve doesn’t directly control interest rates set by individual financial institutions. The Federal Open Market Committee (FOMC) — the division of the Fed responsible for setting monetary policy — controls the federal funds rate. That’s the short-term interest rate that depository institutions charge each other to borrow money overnight.

Learn more: Federal funds rate: What it is and how it affects you

When the FOMC raises or lowers its target rate, banks typically follow suit. Rising rates generally make it more expensive for consumers to borrow money, but it also means they’ll earn higher rates on savings accounts, certificates of deposit (CDs), and money market accounts. Conversely, lowering rates decreases short-term interest rates on credit products and deposit accounts.

Here’s a look at how rates have changed since 2022:

U.S. presidents don’t have authority over the Fed, but they do have certain powers that can impact the future of the Fed and its decisions.

The chair of the Board of Governors of the Federal Reserve System leads the Fed in working toward its key goals, including maximum employment, stable prices, and moderate long-term interest rates. Some of the Fed chair’s responsibilities include reporting to Congress on the Fed's monetary policy objectives, testifying before Congress, and meeting periodically with the Treasury Secretary.

According to the Federal Reserve Act, the chair and vice chair of the board are appointed by the president but must be confirmed by the Senate. Fed chairs and vice chairs serve four-year terms and can be reappointed by the sitting president. They can also be ousted by a sitting president, although this has never happened.

The president also nominates the seven members of the Board of Governors who serve on the FOMC and oversee the 12 Reserve Banks. Each member is appointed for up to 14 years, which is considered a full term, after which they can’t be reappointed.

Again, the president also has the ability to remove a governor from their seat. According to the Federal Reserve Act, governors can be removed by the President “for cause,” which is generally understood to mean serious misconduct or inability to perform the job — not simply policy disagreements. Until now, no Fed governor has been removed by a president.

In his letter, Trump accused Cook of mortgage fraud, citing this as justification for firing her. The matter was referred to the Justice Department for investigation, though Cook has not been officially charged with any crime.

In a statement released by her attorney, Abbe Lowell, Cook said she would not step down, explaining that President Trump does not have cause and therefore, no authority to remove her. Lowell said Tuesday they would be filing a lawsuit to challenge what they called an "illegal action."

Though presidents can’t control interest rates directly, they can discuss their stance on current monetary policy and its impact on rates. But this can be a touchy topic.

“Institutionally, the Federal Reserve is very protective of its independence because that independence helps it achieve its mandate,” said Scott Fulford, a senior economist at the Consumer Financial Protection Bureau. “Most presidential administrations go out of their way to avoid even publicly commenting on Fed policy.”

Even so, that hasn’t stopped our current president from expressing his views on the Fed and its decisions.

For example, earlier this year, Trump posted on social media that Powell's termination as Fed chair "cannot come fast enough" and referred to him as "a major loser."

Experts maintain that the Fed will continue to make decisions independently. Still, this outside commentary can lead to campaign promises and political actions that impact inflation and consumer prices in other ways, according to Fulford.

“For example, this administration has focused on resolving supply chain problems and reducing monopoly rent-seeking, which reduces inflation,” Fulford said. “Congress could raise taxes or spend less, which would also affect inflation.” He added that there are many policies that affect the broader cost of borrowing as well, such as reducing late fees or closing costs.

Bottom line: The Fed is designed to operate independently of politics, but public statements by the president can shape market expectations and potentially influence the Fed's policy decisions indirectly.

Banks and credit unions can adjust their rates at any time at their discretion. You can’t control how rates change, but you can implement smart savings strategies to ride out interest rate fluctuations:

Consider a high-yield savings account. These savings accounts offer higher interest rates compared to traditional savings accounts. When interest rates fluctuate, you can be sure you’re still earning a competitive rate compared to the market average with a high-yield account.

Start now. Compound interest helps your savings grow exponentially over time. The earlier you begin saving, the more your balance will grow. Plus, you’ll have a head start if rates fall in the future.

Shop around. Whether you’re looking to open a new savings account or reevaluate the one you currently have, regularly reviewing the best savings rates available can ensure you’re not missing out on better opportunities.

Lock in your rate. If you think rates may fall soon, putting your money in a CD allows you to lock in competitive rates for the next several months or even years. Keep in mind that CDs require you to keep your money on deposit until the maturity date, otherwise you’ll be subject to an early withdrawal penalty.

The Federal Reserve has made its third consecutive rate cut since September.

During the The Federal Open Market Committee (FOMC) session on December 18, 2024, the Fed lowered its target federal funds rate range by 25 basis points (a quarter percentage point). That brings the current target to 4.25%-4.50%, down a full percentage point since the Fed began cutting rates earlier this year.

Throughout the high rate environment of the past couple years, the cost of credit card debt has greatly increased for some Americans:

Average credit card interest rates increased from around 16% in 2022 to over 21% today.

Credit card debt balances grew by 8.1% between Q3 2023 and 2024.

Total credit card debt surpassed $1 trillion for the first time in 2023.

In the past year, 8.8% of credit card accounts became delinquent (30 or more days past due).

But falling federal interest rates may not offer the relief you’re looking for. After all, plenty of factors influence your credit card’s interest rate. Despite the most recent rate cut — and any further cuts the Fed makes in 2025 — you shouldn't wait to begin paying down debt.

Credit card interest rates could change when the Federal Reserve lowers the federal funds rate, since many credit card APRs are variable and move over time. But don’t count on lower interest rates to make a significant difference in your credit card interest charges.

Even with the Fed's recent rate cuts, credit cards with APRs near 25% or 30% are likely to remain unaffected.

Consider, for example, the last time the Fed cut the federal funds rate. In February 2020, the federal funds target rate was 1.50%–1.75%, and the average credit card interest rate was 15.09%. By May, the US central bank had cut rates to a target 0.00%–0.25%, a drop of 150 basis points, to support the economy during the Covid 19 pandemic. But, average credit card rates fell only about half a point to 14.52%. They remained around there until rate hikes started again in early 2022. As of August 2024, the average credit card rate is 21.76%.

What’s more, there’s a growing gap between the banking industry’s benchmark rate, the so-called prime rate at which banks lend to their best customers, and the rates credit card companies charge — another factor that could keep your credit card APR high regardless of the Fed’s decisions.

The APR margin between credit card interest rates and the prime rate, which banks usually set about three percentage points above the federal funds rate, has skyrocketed since the last time the federal funds rate was cut in 2020. In February of 2024, APR margins hit an all-time high.

So, while credit card interest rates may dip slightly when federal funds rate cuts occur, the difference for cardholders can be minimal.

You can always find your current APR through your online account or on your monthly credit card statement. If your credit card APR isn’t automatically lowered, you can ask your issuer for a lower APR — while there’s no guarantee, you may have a better chance if you’ve improved your credit score or increased your income since you applied for the card.

Just remember: A lower interest rate isn't a reason to make only minimum payments. You may see your required minimum payment decrease because a lower interest rate means fewer interest charges can accrue daily. But paying only that amount can leave you with mounting debt balances each month.

Instead of waiting for additional relief from the Fed, you’ll be much better off taking action to clear your credit card debt now.

Don’t wait to get ahead of your credit card debt. These are some options to consider today:

You may qualify for a balance transfer credit card if you have a solid credit score. These cards carry an introductory 0% APR on your transferred balances. Today, intro periods typically range from 12 to 21 months.

When you transfer your balance to the new card, you should be prepared to pay a balance transfer fee. These fees can set you back around 3% to 5% of your total balance. On a balance of $5,000, that could be as much as $250. Don’t let that dissuade you from a balance transfer though — the fee is still much less than the thousands you could otherwise pay in interest.

Here are a few of the best balance transfer credit cards available today. Some even offer rewards you can continue to earn after you pay down your debt.

If you’re only making minimum payments toward your credit card balances, now is the time to start putting as much as you can toward paying down your debt. Minimum payments can leave you with mounting debt balances for years and no end in sight. Even if you can only pay a few dollars more than the minimum each month, you’ll start to chip away at the debt more quickly.

Say you have a $5,000 balance on a card with a 21% APR. With minimum payments (calculated as 1% of the balance plus accrued interest), it could take you more than 23 years to pay the balance in full. If, instead, you could dedicate $200 toward the debt each month, you could pay it off in a much more manageable 37 months.

Try implementing debt payoff strategies like the snowball or avalanche method, or focus on making multiple monthly payments if it helps you get ahead of your minimum.

It may be the most obvious move, but one of the toughest to implement: If you’re working on paying down debt, try not to spend more on your card and increase your balances.

You might forfeit some rewards value from the points and miles you would otherwise earn, but it can be a good idea to switch to a debit card or cash if you have a tendency to overspend using credit. Those rewards are not worth nearly as much as you’ll spend paying down interest charges and balances you can’t afford.

If you’re really struggling with long-term debt that never seems to go down, you may want to look into credit counseling. A credit counselor can help you develop a realistic budget for your spending, manage existing debts, or even develop a debt management plan. This can be especially useful if you don’t have the great credit score required to take advantage of tools like a 0% APR card.

To get started, you can learn more about credit counseling through the Consumer Financial Protection Bureau, or look into nonprofit credit counseling organizations like the National Foundation for Credit Counseling or the Financial Counseling Association of America.

This article was edited by Rebecca McCracken

Editorial Disclosure: The information in this article has not been reviewed or approved by any advertiser. All opinions belong solely to Yahoo Finance and are not those of any other entity. The details on financial products, including card rates and fees, are accurate as of the publish date. All products or services are presented without warranty. Check the bank’s website for the most current information. This site doesn't include all currently available offers. Credit score alone does not guarantee or imply approval for any financial product.

The Federal Reserve, or “the Fed,” is the central bank of the U.S. and plays an outsized role in shaping the nation’s monetary policy. One of its key functions is setting interest rates. Those rates determine how much Americans earn on their savings and how much they pay to borrow — including when buying a home. The Fed indirectly impacts mortgage rates by setting what’s called the federal funds rate, and that rate impacts a wide variety of financial products. As a result, when the fed funds rate rises and falls, so do the rates Americans pay on home loans.

Read more: How are mortgage rates determined? It’s complicated.

In this article:

What does the Federal Reserve do?

The federal funds rate

Fed rates and mortgage rates

Do mortgage rates go down when the Fed cuts rates?

Tips for borrowers

FAQs

To understand how the Federal Reserve works, think of the U.S. economy as a farm and the Fed as a farmer in charge of water, representing money and credit. “Our farmer wants enough water flowing into the farm so that the crops grow. Think of that like job creation and economic growth,” said Corbin Grillo, a certified financial analyst with Linscomb Wealth, via email. If the farmer (the Fed) leaves the faucet on full blast, the crops will flood, causing inflation. If the farmer doesn’t water the crops enough, they’ll wither, causing a recession.

The Fed’s job is to continuously make decisions that keep the right amount of water (money and credit) flowing so that its crops (the U.S. economy) grow and thrive.

Dig deeper: Do mortgage rates decrease in a recession?

To control the flow of water (money and credit), the Fed sets the federal funds rate, a benchmark interest rate that affects multiple parts of the economy. Consumers can see the impacts of the fed funds rate on products, ranging from savings accounts to mortgage rates.

And although the federal funds rate doesn’t affect mortgage interest rates as directly as savings or personal loan rates, it does have an influence. (More on that later.)

If the economy is dry — that is, if people aren’t spending money — the Fed adds more water by lowering the fed fund rate to encourage people to spend. Low interest rates make it less expensive to borrow money, so people tend to spend more freely and use credit to make larger purchases. However, if the economy starts to flood because people are spending too much, the Fed dials back the water to keep the crops (economy) alive by increasing the fed funds rate. Higher interest rates encourage people to save instead of spend because borrowing money is expensive.

While the federal funds rate had been at a 23-year high since July 2023, the Fed finally lowered it at its meetings in September, November, and December 2024. The central bank left the rate unchanged at its first five 2025 meetings before finally cutting it by 25 basis points at its September meeting.

Read more: When is the next Fed meeting?

Remember how we said that the Fed doesn’t directly set mortgage rates? It’s true. However, the fed funds rate impacts the yield on the 10-year Treasury note, which directly affects what consumers pay when they borrow money, said Kevin Khang, senior international economist with Vanguard, in a phone interview.

“[The] 10-year rate, the yield on that note, is kind of like the absolute minimum people should expect to pay when they borrow,” Khang said. “It serves as a benchmark, and everyone else should expect to pay a little more.” Why more? The middlemen. “Lenders have to get compensated for taking on the credit risk for homeowners.”

So, let’s look at how the 10-year Treasury and mortgage rates have moved together in the past few years. In May 2020, the fed fund rate dropped to 0.05%, and the 10-year Treasury yield was roughly 0.64%. The average rate on a 30-year fixed-rate mortgage at the time was 3.28%. Now, let’s look at the last six months or so.

Inflation meant that the Fed needed to dial back the water, so it raised the federal funds rate. As of early August 2024 (before the Fed finally cut the rate in September), the 10-year Treasury yield was 3.99%, and the 30-year fixed rate was 6.73%.

As of mid-September 2025, the fed funds effective rate was 4.33%, and the 10-year Treasury was 4.06%. The average 30-year fixed mortgage rate was then 6.35%.

The 10-year Treasury yield and mortgage rates also tend to increase when the federal funds rate increases. However, the inverse is also true.

Usually, the simple answer is yes — mortgage rates tend to go down when the Fed cuts interest rates. Or rather, mortgage rates typically decrease before an anticipated Fed rate cut.

However, right now, the answer is: It depends. There's a lot going on in the U.S. economy that impacts mortgage rates other than the Fed rate. Investors' assessments about what Trump is doing in office are affecting the 10-year Treasury yield, and Trump and the Federal Reserve have a complicated relationship. A lot is up in the air about how the latest and future Fed rate cuts will impact mortgage interest rates.

Learn more: Will mortgage rates go down in 2025?

Now that you understand the connection between Fed rates and mortgage rates, what should you do with this information? Here are some ideas to consider as you look to purchase or refinance a home in today’s economy.

“We generally wouldn’t recommend consumers spend much time worrying about things that are out of their control,” said Grillo. Since you have no impact on the federal funds rate or the 10-year Treasury yield, it’s better to focus on things in the mortgage process under your control.

Comparing mortgage lenders, interest rates, and closing costs can help you find the best possible product for your credit score, market, and financial situation.

Over the past few years, adjustable-rate mortgages have fallen out of favor as interest rates climbed. Now, these mortgages could help first-time buyers and those refinancing ride an anticipated wave of declining interest rates. Popular mortgages for first-time buyers, like VA and FHA loans, offer adjustable-rate products.

While there’s no guarantee that mortgage rates will decrease, you may want to consider an adjustable-rate loan. A conversation with a mortgage professional can help you understand your options.

If you value consistency and predictability, you may be better off with a fixed-rate mortgage if rates trend downward. With the Fed’s conservative outlook on cutting rates, how long should you wait before locking in a mortgage rate? Khang said the decision is personal and depends on your needs and finances. If you need to move, you may take today’s best rate and hope to refinance into a lower rate later.

Others may have more flexibility. Khang said that those who don’t need to buy now may want to hold out for at least a year now that the Fed has started cutting rates. “Financiers can take some time to adjust their spread [between the 10-year Treasury and mortgage rates],” Khang said. “So, it can take some time for lenders to catch up with lower rates.”

Dig deeper: Adjustable-rate vs. fixed-rate mortgage — Which should you choose?

The Federal Reserve sets the federal funds rate. That rate influences the yield on the 10-year Treasury note, which serves as the index for most mortgage rates in the U.S. As the fed funds rate increases and decreases, so does the yield on the 10-year Treasury; mortgage rates tend to follow the same trends.

If interest rates drop, your mortgage payment may go down if you have an adjustable-rate mortgage. However, if your current mortgage is a fixed-rate product, your interest rate remains the same for the life of your loan unless you refinance to a loan with a lower rate.

The Federal Reserve tends to have the most control over housing interest rates in the U.S. It sets the federal funds rate, which influences rates on various products, including government securities, savings accounts, and loans. As the fed funds rate rises and falls, so do mortgage rates.

Laura Grace Tarpley edited this article.

Ever wonder why mortgage rates fluctuate or why saving for a big purchase sometimes feels harder than it should? You can thank, at least in part, a group of policymakers at the U.S. central bank known as the Federal Open Market Committee (or FOMC for short).

This committee’s decisions affect everything from the cost of borrowing, the value of your savings, and even the stability of your job.

Here’s a closer look at what the FOMC does, why, and how it impacts your finances.

The Federal Open Market Committee is a key component of the Federal Reserve System, the central bank of the United States.

The Fed monitors and ensures the stability of the U.S. economy by setting the country's monetary policy (actions taken by a central bank to achieve larger economic goals such as maximum employment and stable prices). It controls three major tools of monetary policy: open market operations (OMOs), the discount rate, and reserve requirements.

While the Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, the FOMC is responsible for open market operations, which put simply, refers to the purchase or sale of government securities by the central bank on the open market to regulate the amount of money in the banking system.

The FOMC uses OMOs to achieve its target federal funds rate, the interest rate banks charge each other for ultra-short-term loans, which influences other short- and long-term rates, as well as foreign exchange rates.

The federal funds rate is also a key tool for managing inflation. When the Fed raises interest rates, borrowing money becomes more expensive and the economy slows, bringing down inflation. If the economy needs a boost, the Fed lowers interest rates, which may also contribute to rising prices. The Fed aims to maintain an inflation rate of 2%, which is considered an indicator of a healthy economy.

The Federal Open Market Committee consists of 12 members:

Seven members of the Board of Governors of the Federal Reserve System. These members are appointed by the president of the United States and are confirmed by the Senate. Each governor serves a 14-year term, which is staggered so that one term expires every two years.

The president of the Federal Reserve Bank of New York.

Four of the remaining 11 Reserve Bank presidents. These four seats are filled by one Reserve Bank president from each of the following four groups of banks: Boston, Philadelphia, and Richmond; Cleveland and Chicago; Atlanta, St. Louis, and Dallas; and Minneapolis, Kansas City, and San Francisco. Members serve one-year terms on a rotating basis with other Reserve Bank presidents. However, all Reserve Bank presidents attend FOMC meetings, even when they are not designated voting members.

Read more: How much control does the president have over the Fed and interest rates?

The FOMC has eight scheduled meetings per year, usually at the Board Room at the Eccles Building in Washington, D.C. The topics the FOMC discusses include:

The outlook for the American economy

The outlook for foreign economies

The outlook for regions in America; the Reserve Bank presidents in particular will talk about conditions in their districts, as well as discuss their views on the national economy.

Following these discussions, designated FOMC members vote on the appropriate course of action, including whether to raise, lower, or maintain the federal funds rate.

The FOMC makes numerous impactful decisions, but what tends to get the most attention is if and when it will adjust the federal funds rate.

When the Fed increases its target rate, the interest rates on loans and credit cards also go up. In other words, it becomes more expensive to borrow money. But rising interest rates aren’t all bad — it also means you’ll ultimately earn higher rates on your deposit accounts, including high-yield savings accounts and certificates of deposit (CDs).

Read more: Why you should open a CD account before the Fed's next meeting

The FOMC's actions influence your cost of living as well, since the federal funds rate is a key tool for managing inflation. For example, when inflation is high, your money loses purchasing power over time.

These policy decisions also have a ripple effect through the economy, influencing (albeit less directly) job stability, stock market returns, home prices, and more.

Read more: A look at the federal funds rate over the past 50 years: How has it changed?

The Fed is short for the Federal Reserve System, and it’s the central bank of the United States. The FOMC is a committee within the Fed.

In theory, decisions by the FOMC don’t affect the stock market. In reality, however, the FOMC influences the market all the time. Investors often buy or sell stocks based on what they believe the FOMC will do with interest rates; when it costs less to borrow money, companies can then borrow more and invest in their businesses, which often leads to more profits in the long run. So investors (usually) like to see interest rates lowered, or at least remain unchanged.

The FOMC schedules eight meetings a year. These meetings happen about every six weeks, though the committee can hold additional meetings to respond to urgent economic matters, if necessary.