Interest rates play a pivotal role in the course that the economy takes. The slightest deviation in the Federal Reserve’s policy in regard to rates can send stock markets soaring or plummeting.
As the central banking system of the United States, the Fed implements monetary policy by targeting the federal funds rate with the goal of controlling inflation. This is the rate that banks charge each other for overnight loans of federal funds. The Fed also sets the discount, which is the interest rate that banks pay the Fed to borrow directly from it. Both rates influence the prime rate, which is usually about 3 percentage points higher than the federal funds rate. The prime is the rate at which most banks price their loans to their best customers.
Lower interest rates stimulate economic activity by lowering the cost of borrowing, while higher rates slow the economy by increasing the cost of borrowing.
If you’d like to know more about interest rates and how they can affect your wealth, click below.
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