Here's how the Fed's decision to raise interest rates could impact your life
Reuters
If you've ever borrowed money or opened a savings account, then the Federal Reserve matters to you.
The US central bank just raised its benchmark interest rate for the first time in a year — to a target of 0.5% to 0.75% — and signaled that there are more increases to come.
That rate, called the Fed funds rate, serves as a benchmark for basically every interest rate on the planet: Government borrowing rates, mortgage rates, credit-card rates, savings account yields, and so on.
The Fed uses it as a way to accelerate, or slow, economic growth. The rate is rising because the job market is relatively strong and the central bank doesn't want prices rising too fast. Making it costlier to borrow will eventually slow spending by companies and consumers alike.
So, even if you're not a titan of finance, the Fed's interest rate decision could still affect you if you're planning to buy a house or save for retirement. Here are some of the major ways the Fed can impact the lives of everyday Americans.
The Fed's main monetary policy tool is the Federal Funds Rate.
Business Insider/Andy Kiersz, data from FREDThis is the interest rate banks charge other banks for short-term loans. They borrow from each other to make sure they have enough reserves in house at any given time.
The Federal Open Market Committee (FOMC) decides on a target rate, and the Fed buys and sells securities like US government debt to maintain that rate.. In the wake of the financial crisis, the Fed lowered the target rate to 0%, where it stayed for nearly 7 years before being increased to 0.25% - 0.50% in December 2015, and to 0.50-0.75% in December 2016.
Prime loan rates are established by private banks as a baseline rate for loans to businesses and consumers.
Business Insider/Andy Kiersz, data from FREDPrime rates tend to closely track the fed funds rate. As we will see, that baseline rate affects interest rates for several other forms of borrowing and saving. Between December 2008 and December 2015, the era when the Fed held the target funds rate near zero, the prime rate among the 25 largest banks stayed steady at 3.25%.
Since the first rate hike in 2015, the prime rate has notched up accordingly to 3.5%. The Fed's decision Wednesday to move the fed funds rate up for the first time in a year is already making its way into the prime rate, with at least a dozen major banks announcing that it has increased to 3.75%.
Interest rates for major consumer loans tend to move along with the prime rate, and thus the Fed funds rate.
Business Insider/Andy Kiersz, data from FREDInterest rates for two year auto loans are usually slightly higher than the prime lending rate, so if that begins to rise, consumer loans will likely follow.
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