At 2 p.m. EST, the Federal Reserve is expected to announce another interest rate hike. While most Americans are familiar with the idea of a federal interest rate, interest rates on different U.S. bonds, bank accounts, credit cards, mortgages and other financial instruments vary widely.
Update: The Fed announced it will up the fed funds target rate by 0.25 percent to a range of 0.75-1.0 percent.
What rate exactly is the Federal Reserve changing and what type of direct impact does it have?
Fed Funds Rate
The Federal Reserve has control over the federal funds rate. The federal funds rate is a specific interest rate that dictates the interest rate charged on funds borrowed overnight by major financial institutions. Because the fed funds rate only applies to a limited number of institutions and extremely short-term (overnight) loan durations, the rate is typically relatively low. Today, the fed funds rate stands at just 0.75 percent, but traders anticipate it could rise up to 1.75 percent this week.
The fed funds rate peaked at around 5.25 percent in 2007 prior to the Financial Crisis and has remained historically low for most of the years since.
While the fed fund rate doesn’t directly impact most Americans, it certainly has an indirect impact. The Fed uses interest rates as a way to keep inflation in check. In other words, higher interest rates are likely to keep prices from rising too much at the supermarket.
Impact On Credit Cards
While the Fed doesn’t have any jurisdiction over credit card companies like Visa Inc V 0.37% or Mastercard Inc MA 0.34%, these companies often set their variable credit card interest rates as a function of the fed fund rate. The same can be said for certain auto and mortgage lenders as well, meaning variable-rate mortgage or auto loans could be getting slightly more expensive.
For savers, higher interest rates are great news. The interest rates banks offer for certificates of deposit (CDs) are also usually set in relation to the fed funds rate. Today, U.S. savers are only getting an average of 1.25 percent interest on a one-year CD.
So while the Federal Reserve’s interest rate decision may seem like something that only impacts banks and economists, this week’s news could have…
Click here to continue reading
Want to learn more about how to profit off the stock market? Or maybe you just want to be able to look sophisticated in front of your coworkers when they ask you what you are reading on your Kindle, and you’d prefer to tell them “Oh, I’m just reading a book about stock market analysis,” rather than the usual “Oh, I’m just looking at pics of my ex-girlfriend on Facebook.” For these reasons and more, check out my book, Beating Wall Street with Common Sense. I don’t have a degree in finance; I have a degree in neuroscience. You don’t have to predict what stocks will do if you can predict what traders will do and be one step ahead of them. I made a 400% return in the stock market over five years using only basic principles of psychology and common sense. Beating Wall Street with Common Sense is now available on Amazon, and tradingcommonsense.com is always available on your local internet!
