If you’ve ever borrowed money or collected interest on something, then the Federal Reserve matters to you.
At 2:00 p.m. ET, the Fed will decide if it will hike the Fed funds rate. And in one way or another, the Fed funds rate serves as the benchmark for basically every interest rate on the planet. Government borrowing rates, mortgage rates, credit card rates, savings account yields, etc.
The Fed funds rate target is currently in a range of 0 to 0.25%. This so-called zero-interest rate policy (ZIRP) was introduced by the Fed in December 2008 in its effort to stimulate growth and inflation in the wake of the financial crisis.
Seven years later, it seems pretty clear that the economy is out of crisis. And it’s becoming increasingly likely that the Fed hikes before the year is over.
Even if you’re not a titan of finance, the Fed’s interest rate decision could still affect you if you’re planning to buy a house or save for retirement. Here are some of the major ways the Fed can impact the lives of everyday Americans.
This is the interest rate banks charge each other for short term lending to maintain reserve requirements. The Federal Open Market Committee (FOMC) decides on a target rate, and the Fed buys and sells securities like US government debt to maintain that rate. In the wake of the financial crisis, the Fed lowered the target rate to 0%, where it has stayed for nearly 7 years.
Prime loan rates are established by private banks as a baseline rate for loans to businesses and consumers.
Prime rates tend to closely track the fed funds rate. As we will see, that baseline rate affects interest rates for several other forms of borrowing and saving. Since December 2008, when the Fed dropped the target funds rate to zero, the prime rate among the 25 largest banks has remained steady at 3.25%.
Interest rates for major consumer loans tend to move along with the prime rate, and thus the Fed funds rate.
Credit card interest rates have been quite a bit higher than the prime rate, but still loosely track the underlying baseline rates.
Over the last 20 years, which is the extent of the data available through the St. Louis Fed, credit card rates rise and fall along with the prime rate and Fed funds rate.
Those longer term government borrowing rates are extremely important if you're looking to buy a house.
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