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What Does the Federal Reserve Do, Anyway?Interest rates, explained.


Posted Monday, Oct. 24, 2005, at 4:00 PM ET

Today, President Bush nominated Ben S. Bernanke to succeed Federal Reserve Chairman Alan Greenspan, who's stepping down in January. Bernanke, the current chairman of the White House Council of Economic Advisers, was the odds-on favorite for the job. Daniel Gross wrote back in May 2004 that Greenspan had worn out his welcome. So, what exactly does the Fed do? In 2001, Emily Yoffe explained the basics—how the Fed raises or lowers the interest rate at which banks lend money to one another—as well as the effects of monetary policy on the everyday economy: "So, why should some technical transaction between banks affect average Americans? Because the target that the Fed sets … is the rate on which most other rates of credit are based. When the Fed acts, banks immediately adjust their prime lending rate, which affects mortgage rates, credit card rates, car loan rates, etc."

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