Overview: The History of the Federal Reserve

You may give little thought to the Federal Reserve (Fed), but it looms large over your life as you borrow, save, spend, and invest.

Congress has given the Fed the double mandate of controlling inflation and maintaining maximum employment. These goals can sometimes be at odds with each other.

Let’s look at the Fed’s origin story and how the central banking system can affect you.

How It All Began

A secret meeting in 1910 on an island off the coast of Georgia laid the foundation for the Federal Reserve. After a series of financial panics and recessions, six men gathered at the Jekyll Island Club to write a plan to reform the nation’s banking system.

At that time, U.S. banks held large cash reserves, but they were scattered across the country. During a crisis, the reserves would be frozen. In addition, the supply of currency was inelastic, and gold supplies were limited. Plus, U.S. banks could not operate overseas.

The Panic of 1907 — a worldwide financial crisis surpassed only by the Great Depression — galvanized Congress, and particularly Senate Finance Committee Chairman Nelson Aldrich. In the fall of 1910, Aldrich and his Jekyll Island colleagues developed a plan for a central bank with 15 branches. The national body would set discount rates for the system and buy and sell securities.

Political wrangling ensued, but Congress passed the Federal Reserve Act, which resembled the Aldrich plan, and President Woodrow Wilson signed it in 1913. The law called for a central banking system with a governing board and multiple reserve banks. This hybrid structure endures to this day.

A golden factoid: What is now the most influential of the 12 reserve banks, the Federal Reserve Bank of New York, is home to the world’s largest gold storage reserve, with about 507,000 gold bars owned by the U.S. government, foreign governments, other central banks, and international organizations.

The First Century of the Federal Reserve

Before the Fed was born, financial panics caused by speculation and rumors prompted calls for a central banking authority to support a healthier banking system.

World War I, 1914 to 1918

The Federal Reserve Board and the 12 reserve banks were just getting organized as war broke out in Europe. But once the nation entered World War I, the Fed quickly became a major player by supporting the U.S. Treasury’s war bond effort and offering lower interest rates to member banks when the proceeds were used to buy bonds.

The Fed also gave better interest rates to other banks purchasing Treasury certificates. Lower rates led to increased borrowing by businesses and households, which stimulated economic growth. But the increased money supply eventually led to rising prices. When the war ended, the Fed took action to control that inflation.

Stock Market Crash of 1929

On October 28, 1929, now known as Black Monday, the Roaring Twenties ended with a thud when the Dow Jones Industrial Average dropped nearly 13%. The market collapsed the next day. It was the most devastating stock market crash in U.S. history.

Some economists and historians blame the Fed for the crash because of its decision to raise interest rates in 1928 and 1929 to control overspeculation (what today might be called “irrational exuberance”) in the stock market.

The Fed’s leaders reduced the money supply starting in 1928 and pressured member banks in 1929 to rein in their broker loans and charge higher rates on them.

The Great Depression, 1929 to 1941

The deepest downturn in U.S. history lasted from 1929 to 1941. It began in the United States and reverberated around the globe.

The banking panics in 1930 and early 1931 were regional, but in late 1931, the commercial banking crisis spread throughout the nation. The Fed’s efforts to contain the collapse were not enough, and the situation had reached rock bottom by March 1933.

On March 6, 1933, President Franklin Roosevelt — who’d been inaugurated just two days before — announced a weeklong suspension of all banking transactions. Legislative intervention soon followed.

In 1933, the Glass-Steagall Act separated commercial and investment banking. It gave the federal government and the Fed enhanced powers to deal with the economic crisis, leading to the creation of the Federal Deposit Insurance Corporation (FDIC) and regulation of deposit interest rates. At an FDIC-insured bank today, deposits are insured up to $250,000 per depositor, per institution, and per ownership category.

The Banking Act of 1935 gave the Fed more independence from the executive branch; shifted power from the regional reserve banks to the Board of Governors, based in Washington, D.C.; and led to the modern form of the Federal Open Market Committee (FOMC), the Fed’s main monetary policymaking committee, which consists of the Fed governors in Washington and the presidents of the 12 regional banks.

World War II, 1941 to 1945

The Fed’s role during World War II was similar to its role in World War I. Its main mission became financing the war, and it helped the Treasury Department market war bonds in cooperation with commercial banks and businesses.

The reserve banks also reduced their discount rate to 1% and set a rate of half a percentage point for loans secured by short-term government obligations. During the war years, the Fed kept its eye on inflation by regulating consumer credit. It required large down payments and shorter terms on loans used to buy a variety of consumer goods.

Korean War, 1950 to 1953

At the start of the Korean War, inflation was a growing concern. But the Fed was once again under pressure — this time from the Truman administration — to help finance the war effort.

In February 1951, the Fed declared its independence in fiscal matters. In March, the Treasury and the Fed announced that they had reached an accord on how they would handle “debt management and monetary policies” going forward.

The Great Inflation, 1970s and 1980s

Keeping inflation under control has always been an important role for the Fed, but in the 1970s, when the stock market slumped and the country found itself in an inflation crisis so deep it was known as the Great Inflation, it became especially challenging.

Check the history books and you’ll find plenty of finger-pointing. It was President Richard Nixon’s fault for disengaging from the gold standard, or it was the Fed’s fault for employing a confusing stop-go monetary policy that had interest rates going up, then down, then back up.

Then new Fed chairman, Paul Volcker, took over in 1979 and shifted the Fed’s goal from targeting interest rates to targeting the money supply. It was painful. The prime lending rate (the rate banks offer their most creditworthy customers when they’re looking to take out a line of credit or a loan) skyrocketed to over 20% at one point.

Unemployment reached double digits in some months. The country went through two recessions. But eventually, prices stabilized. The federal funds rate hasn’t been in the double digits since the mid-1980s.

The Great Recession, 2007 to 2009

When a period in U.S. history is labeled “great,” it’s often anything but. During the Great Recession, home prices fell, and the booming subprime mortgage market collapsed.

Unemployment rose. Gross domestic product went down. In 2008, the market crashed. This recession was, for many Americans, the worst of times; they lost their jobs, their homes, and their confidence in the economy.

Enter the Fed, which started by tackling the slump with a traditional response. From September 2007 to December 2008, it lowered the federal funds rate from 5.25% to zero to 0.25%, and FOMC policy statements noted that it would be keeping the rate at exceptionally low levels for a while. But it didn’t stop there.

In 2008, it also began its first round of quantitative easing, buying $600 billion in mortgage-backed securities, and continued that effort in 2009. Also in 2008, President George W. Bush signed the $700 billion Troubled Asset Relief Program into law. Two more rounds of quantitative easing started in 2010 and 2012 under President Barack Obama.

Recommended: Common Recession Fears and How to Cope

The Covid-19 Crisis, the Fed, and Inflation

At the onset of the Covid-19 pandemic and the resulting recession in 2020, making sure the U.S. economy did not fall into a prolonged recession became a higher priority than maintaining inflation at the Fed’s 2% target rate.

The Fed seeks to control inflation by influencing interest rates. When inflation is too high, the Fed typically raises its benchmark interest rate to slow the economy and tame inflation. When inflation is low, the Fed often lowers the federal funds rate — the interest rate at which banks lend money to one another overnight — to stimulate the economy.

After keeping the rate near zero, in March 2022, the Fed approved its first rate increase in more than three years. Between March 2022 and July 2023, the Fed raised rates 11 times, the fastest tightening campaign since the 1980s. The Fed held rates at between 5.25% and 5.50% from July 2023 to September 2024. Then, as the cuts seemed to achieve their goal, inflation slowed.

Inflation, as evidenced by the Centre for Economic Policy Research, peaked in June 2022 and has improved since then. The most recent Consumer Price Index data, for the 12 months ending in January 2026, showed inflation at 2.4%, close to the Fed’s 2% goal.

How the Fed Affects Your Finances

So how do the Fed’s decisions impact you as an individual consumer? For one, banks base their prime rate on the federal funds rate; the prime rate is generally three percentage points higher. This rate, in turn, helps determine the rates that lenders offer their customers.

The Fed’s rate hikes increase the cost of borrowing money for a mortgage, a car, or a credit card balance. Rate increases can also create a more volatile stock market, which could hurt 401(k) plans; impact the amount you earn on a certificate of deposit; or affect what you might pay for a bond. Fortunately, there are ways to protect your money from inflation. For example, if you can swing it, buying a house vs. renting may help protect you from inflation because you can lock in a fixed monthly payment long term. You can also read up on how to invest during a period of inflation.

You may be scratching your head at why the Fed’s rate cuts don’t necessarily result in an immediate reduction in interest rates on home mortgage loans. The short answer is that lenders look at multiple economic data points when setting rates, and the Fed’s action, while important, is not the only factor.

Prospective homebuyers may be wondering whether this is a good time to buy a house. The answer is a very personal one, and chances are it won’t be found in scrutinizing the Fed’s movements. In addition to giving you a place where you enjoy living, homeownership can help build generational wealth. Some people may want to begin building that equity immediately, especially when future mortgage rates, such as those tied to Fed rate increases, are beyond their control.

Recommended: What to Learn From Historical Mortgage Rate Fluctuations

The Takeaway

If you’re planning a vacation, you might not want to tuck away a book on the history of the Federal Reserve. (Or maybe you will. No judgment.) The Fed’s dual mandate to aim for maximum employment and price stability and its history of raising interest rates to counter rising inflation mean that it impacts every aspect of your financial health.

If you’re considering buying a home soon, it can be helpful to look at the history of mortgage rates to put the current conditions into context and to read up on the benefits of homeownership.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

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FAQ

What does the Fed do?

The Fed has several roles. It sets monetary policy, with a goal of maximum employment and stable inflation, and regulates banks and other financial institutions. Its overall objective is to control risks to the economy and financial markets.

How does the Fed set the federal funds rate?

The FOMC sets the target for the federal funds rate, the interest rate banks charge each other for overnight loans. The FOMC meets regularly to review economic data such as inflation, unemployment, and growth. Decisions involve adjusting short-term rates to influence borrowing, spending, and investment, ultimately guiding the economy toward the Fed’s dual mandate of price stability and maximum employment.

What is the prime rate?

The prime rate is influenced by the federal funds rate and often serves as a benchmark for consumer loans, including credit cards and home equity lines of credit. Some lenders offer the prime rate to their most creditworthy customers — those deemed least likely to default on a loan or miss payments.

Why does the Fed raise or lower interest rates?

The Fed raises rates to slow inflation when prices rise too quickly and lowers rates to stimulate borrowing and spending during slow economic periods. Adjusting interest rates influences consumer loans, mortgages, and business credit, shaping economic growth. By carefully balancing rate changes, the Fed aims to maintain a stable economy with low inflation and high employment.

How do Fed rate changes affect mortgages and loans?

When the Fed changes the federal funds rate, banks often adjust their prime lending rates. Higher rates increase borrowing costs for mortgages, car loans, and credit cards, while lower rates make loans cheaper. These changes can influence monthly payments, home affordability, and overall consumer spending, affecting both personal finances and broader economic activity.

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