Bulb with interest rates lit up inside
The Federal Reserve (also known more generally as the Fed) is the U.S.’s independent central bank, established in 1913, that “helps promote a safe and sound monetary and financial system for our nation.” They help promote a healthy U.S. and world economy by using monetary policy tools to ensure maximum sustainable employment, stable prices, and moderate long-term interest rates.
The Fed also serves as a bank to other banks by clearing checks, making electronic payments, and providing the currency that American’s need and use every day.
One of the major tools the Fed uses to help regulate and stimulate the economy is the federal funds (interest) rate. This is the interest rate that banks pay for overnight borrowing in the federal funds market.
When the Fed lowers the federal funds interest rate it charges banks, this makes it cheaper for banks to lend money to consumers and businesses.
In a low-rate environment, for example, you could see lower rates on:
For loans, a Fed rate cut could mean lower monthly payments and less interest paid out over the life of the loan. Since it becomes cheaper to borrow, households are more willing to buy goods and services, and businesses are in a better position to purchase items to expand their businesses. This expansion can lead to businesses hiring more people and thus affecting employment, in addition to a stronger demand for goods and services which may push wages and other costs higher, influencing inflation.
The opposite, when the Fed raises interest rates, is known as contractionary monetary policy. High interest rates make borrowing expensive and increased loan costs slow growth and keep prices low.
When interest rates are low and the economy is poised to consume/spend more, with lower lending federal fund interest rates geared toward expansion, it affects savers by lowering interest rates on savings and certificate of deposit (CD) accounts.
Conversely, when the Fed decides to boost the federal funds rate it charges banks, the interest rates on savings, money market accounts, and CD’s also increases. This will help banks increase deposits (as more people will want to put money in the bank), which provides banks more money to lend to consumers and businesses.
Interest rates for bank savings, money market and CD accounts are primarily based on the Fed funds rate, but also can be adjusted (increase or lower rates) depending on whether the bank needs to build deposits or not. Building deposits helps banks have more funds to lend to consumers and businesses.
Keep an eye out for interest rates because you can benefit from a lower interest rate (if you have a mortgage for example, since even a quarter percentage point can make a difference on your monthly payment) or a higher interest rate (to put more money into savings to earn more interest).
Here is a great resource to monitor all benchmark interest rates.
Contact HOMEBANK today or make an appointment to discuss your borrowing and savings options. We provide personal banking and business banking solutions tailored to meet your needs.