Let us break this down
1. The Feds meet at the reserve building
2. They meet every quarter
3. They talk and think about the economy
4. Often look at economic data
5. Vote yes or no to raise the rates
6. These raise in rates directly impacts bank borrowing rate
7. This all equals the Fed Rate
Now let us piece this together, the feds meet at the reserve building, once a quarter, they sit together in a room discussing potential rate raises or lowering. They will often look at the economic data like CPI to help them determine what to do. Finally they all take a vote on what the rates should be fore the next quarter and this directly impacts the banks borrowing rates.
Fed Rate What?
Fed rate is nothing more than the interest rate that is set by the Federal Reserve, this can be related to something called the fed fund rate which is the interest rate that credit worthy banks lend to each other in the United States. Basically, just know that it is the interest rate set by the Feds.
Think about it as you are buying a car, the interest rate determines your monthly payments for a car, be it a lease or a purchase, now says you buy the car from BMW. They are the ones that set the rates based on what car and when you are buying the car, in this scenario BMW is the FED and you essentially are the bank.
Why it is Important
The Fed Funds Rate is important because it helps dictate the lending and investment market in the USA, if the rates are low then it dictates government investments like CD’s (that pesky thing you grandma keeps buying you) are low, which means there really is no incentive for keeping money in your savings account. On the flip side, if interest rates are low, people are more likely to borrow money and buy houses, cars or even start business because it is cheaper to get a loan, which stimulates the economy, you know that lemonade stand that you wanted to take national, well lets do it!
The rates have been at an all time low since the 2008 Recession, when the feds slashed the rates all the way down to 0% to help stimulate the economy. Since then, the Feds have been meeting and discussing to raise the rates, currently it stands at 0.90% and there is still signs that they could raise it during their next meeting. Our current interest rates reflect a downwards economy not the growth that we have and are experiencing since 2008.
What It Means For Us
• Stabilized Market (With the rates increasing, our stock market will no longer act in fear for what the Feds will do
• Borrowing money becomes more “expensive”(higher rates, means bigger payments for same loan payments)
• Possible Dollar Strengthen (Bonds and Treasury return rates increase, attracting foreign investors to dump their currency for US investments, making the dollar more in demand). EUROPE TRIP ANYONE?
• Higher return for savers (CD’s and other saving accounts rates will go up, as the bank wants you keep your money with them instead of borrowing against high lending rates from the Fed, Great news for all you penny pinchers)