Why Is The Fed Funds Rate Important To You
The Federal Reserve raised the Federal (Fed) Funds Rate for the 4th time this year. In fact they have raised it 7 times during President Trump’s Administration.
There is quite a bit of talk about the fed funds rate so I wanted to give those of you who may not know some information on why the raising or lowering of the Fed Funds Rate is important to you.
According to Investopedia the fed funds rate is:
the rate at which depository institutions (banks) lend reserve balances to other banks on an overnight basis. Reserves are excess balances held at the Federal Reserve to maintain reserve requirements
You still might be asking why that is important to me, well Investopedia went on to say:
The fed funds rate is one of the most important interest rates in the U.S. economy since it affects monetary and financial conditions, which in turn have a bearing on critical aspects of the broad economy including employment, growth, and inflation. The fed funds rate also influences short term interest rates, albeit indirectly, for everything from home and auto loans to credit cards, as lenders often set their rates based on the prime lending rate. The prime lending rate is the lending rate at which banks charge their customers. The Federal Open Market Committee (FOMC) meets eight times a year, to set the fed funds rate, and uses open market operations to influence the supply of money to meet the target rate.
Basically when the fed funds rate is increased the following is increased:
- Credit Card rates
- Auto Loan Rates
- Home Equity Loans
- Adjustable Rate Mortgages
It comes down to anything that has an interest rate involved with it is affected.
The Federal Reserve Committee raise rates when they believe the economy is doing well and they are concerned about inflation, it is quite often stated that they want to apply the brakes a bit on the economy so it does not overheat. By raising the rate there is less money that would be borrowed so the money supply in the economy would shrink lessening the fear of inflation.
By the way I think this can lay to rest all of the people who believed that President Obama presided over a good economy because the Federal Reserve Committee kept the rate at zero between 2008 and 2015, the recession officially ended in June of 2009. They only raised the rate once in the end of 2015 and once in December of 2016 right before he left the Presidency. The Federal Reserve Committee basically was telling all of us that the economy was not that great during the Obama Administration and is doing really well during the Trump Administration.
On the good side your savings and CD rates should be going up.