As a real estate agent, I get lots of questions about the “fed rate” and how it affects the interest rates of home and commercial loans. Here is a bit of information that I hope helps you understand the fed rate and why it is important.
The Fed Rate, or the federal funds rate, is the interest rate that U.S. banks pay one another to borrow or loan money overnight. Since banks are legally required to keep a minimum amount of money in reserves, banks with excess reserves often loan money to banks that can’t meet those reserve requirements. To try and control inflation, economic growth, and the amount of borrowing/lending, the fed rate is adjusted by the Federal Reserve Chairperson (appointed by the President).
When the rate is lowered, borrowing is incentivized, putting more money into the economy. When the rate is increased, it will slow borrowing/lending, making the cost of money more expensive and reducing economic growth in the hopes of reducing inflation.
When the fed rate rises, it doesn’t just affect banks sending and receiving money. Interest rates increase on everyday consumer products such as credit cards, home loans, business loans, credit lines, car payments, etc.
Here’s why that happens: When the fed rate goes up, it’s more expensive for banks to borrow money. So, it gets more expensive for consumers to borrow money, too. Anything tied to financing, including credit cards, car payments, student loans, mortgages, and business loans, can get pricier.
The fed rate stayed below 1.5% or even at 0% for more than 11 years but since March 2022, the Federal Reserve Chairperson has raised the rate to 5% with more rate increases expected soon. The attached charts show the fed rate over time and the rate increases over the last year.