| Lately there has been a lot of talk about the federal | | | | that carry balances on their credit card should be |
| funds rate. This is something that dominates headlines | | | | aware of because sometimes the lender will keep |
| whenever there is a change in this rate. Most recently | | | | charging the same rate. An individual who is aware of |
| the Federal Reserve made a huge rate drop. The 1st | | | | this can most of the time, contact the credit card |
| drop was 3/4ths of a percent, then shortly after by | | | | company and demand a lower rate. |
| another ½ percent bringing the rate all the way | | | | The lowering of the federal funds rate will also |
| down to 3%. Why such the hype? How does this | | | | decrease the interest earned in savings accounts and |
| affect individuals finances? | | | | in CDs. This can force many individuals to seek better |
| What is the Federal Funds Rate? | | | | investment options for their funds because the interest |
| The federal funds rate is the interest rate that banks | | | | earned in savings accounts and CDs is very minimal, |
| lend balances to other depository institutions, usually | | | | most likely not even enough to keep up with inflation. |
| overnight. This rate is the rate that banks can borrow | | | | This can also be good for the stock market because |
| from the Federal Reserve, or in other words, it is the | | | | this can cause higher demand for publicly traded |
| lowest possible rate that banks can charge on interest. | | | | stocks, therefore driving up the prices and increase |
| Changing this rate is one of the primary tools that the | | | | returns. (Also returns can go up from the domino |
| Federal Reserve uses to regulate the supply of | | | | effect created from the dropping of the fed rate, |
| money in the US economy. | | | | which also explains why there is a sudden surge in |
| The Effect of lowering the Federal Funds Rate | | | | stock prices when there was an unexpected |
| By lowering the rate, borrowing becomes cheaper for | | | | decrease of the federal funds rate) |
| banks and with competition among the banks they will | | | | One misconception about the fed lowering the Federal |
| pass this savings onto their customers. This will make | | | | Funds rate is that it directly influences mortgage rates. |
| borrowing cheaper for individuals because the rate at | | | | Mortgage rates are much more complex in how they |
| which banks can lend is less and the default risk also | | | | are determined than just by the Federal Funds rate. |
| goes down because there is not as much interest to | | | | Mortgage rates are based on long term rates, while |
| pay by the individual. The purpose of lowering the | | | | federal funds rate is a short term rate. Mortgages are |
| Federal Funds rate is to create a domino effect that | | | | priced like the stock market, if there is a expected |
| will eventually stimulate the economy. The cycle it is | | | | drop in the federal funds rate, the mortgage rate will |
| suppose to follow is this: the Federal Reserve lowers | | | | price it into the rate before the rate drop even |
| rates, banks lower rates, individuals will borrow more | | | | happens. An unexpected rate drop can influence |
| money, the borrowed money buys goods, the sellers | | | | mortgage rates, but only by a small amount. The fed |
| of the goods make more money and deposit into | | | | rate is an indirect factor in determining the long term |
| banks, banks have more money to lend, then repeat | | | | rates. Even though it is only a small indirect factor, long |
| this cycle and the economy is stimulated. | | | | term interest rates are very low right now and locking |
| What this means to most individuals in the near and | | | | in a safe, low fixed rate at the current time may be a |
| distant future? | | | | good idea. |
| This will help out many individuals with their credit card | | | | Overall, the rate cut is a good thing for credit card |
| interest rates because the prime rate, which directly | | | | interest and other short term loans, but on the negative |
| influences credit card interest is highly correlated to the | | | | side, savings accounts will not earn as much interest. If |
| Federal Funds rate. From the domino effect, credit | | | | all goes as planned the economy will get the extra |
| card lenders are also able to obtain a lower borrowing | | | | boost it needs to stay out of a recession, while also |
| rate and therefore competition will force them to | | | | indirectly making a positive influence on long term |
| decrease their rates. This is one thing that individuals | | | | interest rates and keeping inflation in check. |