More From Ameriprise's Katherine Wahlberg

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The Federal Fund Rate: - This is the interest rate banks and other financial institutions charge each other when lending, usually overnight, through the Fed.
Banks are required to maintain a certain level of reserve cash, either as non-interest-bearing reserves with the Fed or as vault cash.  When an institution dips below this amount (usually 10 percent of total money available on demand), it will borrow from other institutions or the Fed itself.

The People in Your Neighborhood (if you're The Fed)

Ben Bernanke - We like to call him That Wacky Bernanke, but in real life he's The Chairman of The Board of Governors of The United States Federal Reserve (try fitting that on a business card). The Chairman, an appointee of the President, is the head of the central banking system of the US, and one of the most important decision makers in terms of our country's economic policy. The Chairman usually outlasts any administration which appointed him, since the term is 14 years.

Henry M. Paulson - As United States Treasury Secretary, Paulson is the principal advisor to the President on financial and monetary matters. No worries there - according to Wikipedia, Paulson's worth over $700 million, so he's probably ok managing money. He's also fifth in terms of succesion to the presidency.

Want to brush up your cocktail conversation about the Fed?
Visit www.federalreserve.gov, check out the Federal Reserve Act on Wikipedia, and well, if you're looking for a long read, check out Ron Chernow's biography of Alexander Hamilton, the first Secretart of the Treasury, and founder of the national banking system.

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(Prosperity - Katherine A. Wahlberg, CRPC)

The headlines today often highlight the latest actions of the Federal Reserve (commonly referred to simply as “the Fed”). Just why does the Fed generate so much interest on Wall Street, even among those who primarily focus on the fortunes of the stock market?

The simple answer is that the performance of companies is tied in large part to the direction of the economy. The Federal Reserve is the most visible single entity that is charged with keeping the economy on track. Investors are justifiably concerned with actions the Fed may take that could ultimately have an effect on the market. At certain times, the Fed is likely to be less visible and of limited concern to investors. But when the economy is going through a more challenging time, as is the case now, interest in Fed actions tends to peak.

What the Fed does and what it means

The Federal Reserve plays a number of roles when it comes to managing the nation’s money supply, in other words, controlling how much money is actually available in the economic system. While the Fed can’t, on its own, change the course of the economy, specific moves it makes can either help a struggling economy, or slow down one that has become overheated. Its primary mission is to promote sustainable economic growth while keeping inflation under control.

The Federal Reserve began to cut the Fed Funds Rate (see sidebar for definition) in late 2007. Those moves were designed to give the economy a lift to either avoid a recession or at least keep any economic downturn brief and mild.

Markets react quickly but the future is what matters

When the Fed cuts rates, you'll see headlines projecting that the stock market will react favorably. Just why would Fed cuts on the interest rates that banks can  charge each other even matter to the average investor?

If you participate in the stock market, your goal is usually to generate long-term value through your investments. What really matters to you is what happens not on a day-to-day basis, but down the road when the time comes to sell your stock investment. An economic slow down could have an impact on the companies in which you've invested.. Investors are often encouraged to buy stocks if the Fed lowers interest rates. The expectation is that there will be fewer negative effects from the economy, ultimately improving the fortune of companies and their stocks. If, by contrast, the Federal Reserve raises interest rates, yields on other fixed income securities may rise as well. In theory, investors may be more attracted to bonds that pay a higher yield and stock prices could suffer as result.

This simple explanation does not mean that markets will automatically go up if the Fed cuts rates and go down if the Fed raises rates. Federal Reserve actions are just one factor that can impact the economy and, as a result, the markets.

For instance, if the Fed has to cut rates too dramatically, it may be a sign that the economy faces more significant challenges, creating bigger concerns for investors. As a result, stocks may not perform as well during that cycle.

Typically, when the Fed is raising interest rates (in order to help limit the risk that an economy growing too fast could cause inflation problems), stock investors might naturally react somewhat negatively. On the other hand, if all is working right, rate hikes may mean the Fed has managed to keep the economy rolling along without a significant inflation threat. 

Because the Fed has a role to play in the economy, investors are wise to consider the impact to their own portfolio. But keep in mind that Fed actions are only one of many factors that can impact the direction of the stock markets. For assistance on investment decisions, work with a financial advisor.

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This column is provided for informational purposes only. The information is intended to be generic in nature and should not be applied or relied upon in any particular situation without the advice of your tax, legal and/or your financial advisor. Neither Ameriprise Financial nor its advisors or representatives provide tax or legal advice. The views expressed may not be suitable for every situation. Consult with qualified tax and legal advisors concerning your own situation.

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