The Federal Reserve Seal
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From the ongoing shifts in interest rates to President Trump’s nomination of Kevin Warsh as Fed Chair, and disagreements over where policy should go next, the Federal Reserve has garnered quite a bit of the media’s attention. The unique interest rate environment we’ve experienced since the pandemic has resulted in business owners being more tapped into Federal Reserve meetings and commentary than I’ve ever experienced in my tenure as a banker. What I tell my clients is — you’re running a business; the bigger question is less about the headlines and more about the basics.
It’s critical to understand what the Fed does, which signals are worth paying attention to, and what truly changes for your business when policy evolves.
Why the Federal Reserve Was Created and How it Works Today
To understand what the Fed is doing today, it’s important to understand why it exists in the first place. The Federal Reserve was created in 1913 to be the lender of last resort for the U.S. financial system. When credit dried up, businesses couldn’t borrow. Banks pulled back, and economic downturns accelerated. The Fed was designed to stabilize the banking system, manage the supply and cost of money, and support long-term economic growth.
That mission has evolved over time. Today, the Fed operates under a dual mandate: to move the economy toward maximum employment and maintain stable prices. Those goals don’t always move in the same direction and managing the push and pull is a core aspect of the Fed’s job.
The Fed pursues its mandate through monetary policy, setting interest rates and managing the money supply in the country, ultimately shaping financial conditions.
By employing a data-driven policy approach, the Fed uses metrics such as the CPI for inflation and the unemployment rate/job creation numbers to monitor economic progress. These indicators inform decisions on interest rates and the size of the balance sheet. The Fed adjusts interest rates and uses tools like quantitative easing (QE) and quantitative tightening (QT) to manage the money supply.
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The Fed’s role becomes most visible when the financial system is under stress. The 2008 financial crisis being a clear example. As financial institutions faltered and credit markets froze, the Fed stepped in to prevent systemic collapse and keep lending from coming to a halt. It cut interest rates to near zero and provided emergency liquidity to banks and critical funding markets by significantly expanding its balance sheet to support the system. The Fed also acted similarly during the COVID-19 pandemic.
In both situations, the Fed’s objective was to restore balance and mitigate the risk of a continued downward spiral.
Which Fed Signals Matter Most for Business Owners
For business owners, Fed policy surfaces quickly, often in subtle ways, and long before they register as broader trends. The most important signals to watch appear first in operating indicators:
- Cost of capital: Loan rates, terms, and access to credit change.
- Customer behavior: People spend more cautiously, sales cycles get longer and price sensitivity rises.
- Supplier dynamics: Prices move more often, terms tighten, and inventory requires closer cash management.
- Risk appetite: Banks and businesses become more selective about hiring, expansion, and new investments.
- Changes in demand for financial assets and real estate
Interest rates in the mid-single digits should be seen as a planning baseline, not a temporary detour. The smartest financing decisions are the ones grounded in dependable cash flow, strong liquidity, and investments that generate durable returns without relying on the next potential rate cut.
Why This Conversation Matters Now
The Federal Reserve has always played a leading role in shaping the economic environment, yet its influence feels more closely watched and scrutinized than it has in years. Leadership transitions have intensified the conversation, and the nomination of Warsh has spiked the debate around Fed policy.
From my perspective, the core issue isn’t politics, it’s discipline. Over the past 15 years, the Fed’s role expanded beyond its original purpose. The balance sheet grew from under $1 trillion before 2008 to nearly $9 trillion at its peak. That level of liquidity helped stabilize the system in crisis moments, but it also changed how markets function, pushing investors toward risk and inflating asset prices.
A Fed that prioritizes shrinking its balance sheet and returning closer to a lender-of-last-resort model would be a shift toward a more restrained central bank. That would mean less excess liquidity, tighter financial conditions, and a stronger emphasis on letting markets and cycles behave as they naturally do.
The trade-off is that discipline has a price. If tightening happens too quickly, credit conditions can tighten faster than the economy can absorb. The optimistic case is that productivity gains, potentially accelerated by technology, could help offset that restraint without reigniting inflation. The real question is whether policy can recalibrate smoothly, maintaining progress on inflation while supporting stability along the way.
Business Planning with Confidence
Fed policy will continue to change as data shifts, and the big picture will not always come into focus on your timeline. Strong business owners no longer wait for the perfect scenario. They stay disciplined, plan in real time, and continue to move forward.
That’s why the Fed’s independence and data-driven approach matter. When policy is driven by the mandate and numbers, confidence holds. And when confidence holds, businesses can plan, invest, and take smart risks with a steadier foundation.