Economists and analysts pay close attention when the Federal Reserve ꩲmeets to raise or lower short-term interest rates. A lower Fed rate may make stock traders rejoice, but 𝓀it's not necessarily good news for everyone: Rate cuts tend to favor borrowers but hurt lenders and savers.

I𓄧nterest rate changes also greatly impact consumer behavior anಌd the volume of economic activity. Higher rates translate to larger borrowing and financing costs for purchases made on credit.

What Is the Federal Funds Rate?

When we talk about the Federal Reserve raising or lowering interest rates, we are actually talking about the 澳洲幸运5官方开奖结果体彩网:federal funds target rate. The target rate is a guideline for the a🍃ctual🍌 rate that banks charge each other on overnight reserve loans.

Eight times a year, the 澳洲幸运5官方开奖结果体彩网:Federal Open Market Committee (FOMC) meets to set the target rate. Individual banks negotiate the rates on loans to one another, but they usually stay close to the target rate. The target rate is also referred to as the "federal funds rate" or the "nominal rate."

The 澳洲幸运5官方开奖结果体彩网:federal funds rate is important because many other domestic and international rates are linked dir🥀ectly to it or move closely with it.

Why Do Rates Change?

The federal funds rate is a 澳洲幸运5官方开奖结果体彩网:monetary policy tool used to achieve 澳洲幸运5官方开奖结果体彩网:the Fed's goals of price stability or low inflation and sustainable econ❀omic growth. Changes to the federal funds rate influence the money supply, beginning with banks and eventually trickling down to consumers.

The Fed lowers interest rates to 澳洲幸运5官方开奖结果体彩网:stimulate economic growth. Lower financing costs can encourage borrowing and investing but rates can spur excessive growth and perhaps inflation when they're too low. Inflation eats away at purchasing power and can potentially undermine the sustainability of the desired economic ex♛pansion.

The Fed will raise interest rates when there's too much growth. Rate increases are used to slow inflation and return growth to more sustainable levels. Rates can't get too high because more expensive financing can lead the economy into a period of slow growth or even contraction.

Financing

The Fed's target rate is the basis for bank-to-bank lending. The rate that banks charge their most creditworthy corporate customers is known as the 澳洲幸运5官方开奖结果体彩网:prime lending rate. It's linked directly to the Federal Reserve'🌸s target rate and is often referred to as sim𝔉ply "the prime."

Consumers can expect to pay prime plus a premium depending on factors suc❀h as their assets, liabilities, income, and creditworthiness.

A rate cut could help consumers save money by reducing interest payments on certain types of financing that are linked to prime or other rates that tend to move in tandem with the Fed's target rate.

Mortgages

A rate cut typically lowers the cost of financing a ꦍhome but the extent of the benefit from lower mortgage ra꧅tes depends on the type of mortgage loan.

A rate cut will have no impact on the amount of the monthly payment for a fixed-rate mortgage. Low rates can be good for potential homeowners but fixed-rate mortgages don't move directly with the Fed's rate changes. A Fed rate cut changes the short-term lending rate, but most fixed-rate mortgages are unaffected.

澳洲幸运5官方开奖结果体彩网:Adjustable-rate mortgage (ARM) payments will generally decrease when the Fed issues a rate cut. The amount by which a mortgage payment changes will depend on the rate the lender uses when it resets. Many ARMs are linked to short-term Treasury yields that tend to move with the Fed. Many 澳洲幸运5官方开奖结果体彩网:home-equity loans and 澳洲幸运5官方开奖结果体彩网:home-equity lines of credit (HELOCs) are also linked to prime or SOFR.

Credit Cards

The impact of a rate cut on credit card debt also depends on whether the credit card carries a fixed or variabᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚle rate. A rate cut usually results in no change for consumers with fixed-rate cards. Many credit 💝cards with variable rates are linked to the prime rate, so a federal funds rate cut will typically lead to lower interest charges.

Credit card companie🍸s can change interest rates, even for cards with a fixed rate, so long as they provide advance notice.

Savings Accounts

Consumers usually earn less interest on their savings when the Fed cuts interest rates. Banks typically lower rates paid on cash held in bank 澳洲幸运5官方开奖结果体彩网:certificates of deposits (CDs), money market accounts, and savings accounts. It usually takes a few weeks for the rate cut to be reflec🐼ted in bank rates.

CDs and Money Market Accounts

There's no need to worry about a rate cut if you've already purchased a bank CD because your rate is locked in. A rate cut will result in lower rates. If you purchase additional CDs, however, your interest payments will be lower.

Deposits into 澳洲幸运5官方开奖结果体彩网:money market accounts (MMAs) will see similar activity. Banks use MMA deposits to invest in traditionally safe 🦋assets like CDs and Treasury bills, so a Fed rate cut⛄ will result in lower rates for money market account holders.

Money Market Funds

A 澳洲幸运5官方开奖结果体彩网:money market fund 🎶(MMF) is an investment account, unlike a money 🌺market account. Both pay higher rates than regular savings accounts, but they may not have the same response to a rate cut.

The response of MMF rates to a r༺ate cut by the Fed depends on whether the fund is taxable or tax-free, such as one that invests in municipal bonds. Taxable funds usually adjust in line wit꧒h the Fed, so consumers can expect lower rates from these securities after a rate cut.

Rates on municipal money market funds already fall beneath their taxable counterparts because of their tax-exempt status, and they may not necessarily follow the Fed. These funds may also be linked to rates such as SOFR or the Security Industry and Financial Markets🌊 Association (SIFMA) Municipal Swap Index.

Investments

Interest rates also directly impact your investment portfolio including a 澳洲幸运5官方开奖结果体彩网:401(k) plan and brokerage accounts. Lower rates are often a boost to stock prices, because they make it easier for companies to borrow money. Lower rates also let investors with 澳洲幸运5官方开奖结果体彩网:margin accounts take greater advantage of leverage at lower rate🐻s, increasing their effective purchasing power.

Higher rates ca🤡n pull stocks lower but increase the value of bonds. Longer-term bonds are generally more sensitive to interest rate changes🐓 than near-term bonds.

Explain Like I'm Five

The federal funds rate is the interest rate for short-term loans between banks. Eight times a year, the Federal Reserve deci🉐des whether to raise or lower its target rate. Other loans are based on the funds rate, so a rate change has a ripple effect throughout the banking system.

A rate cut makes it cheaper to borrow money. That makes it cheaper for corporations to make investments and hire people, and makes it easier for consumers to buy a house or car. Higher rates make it harder to borrow, but they increase the interest rates on bank deposits.

How Will I Use This in Real Life?

If you ever take out a mortgage or a car loan, or even a credit card, the interest rate w🦋ill be partially determined by the feder🅰al funds rate. If you plan to take out a large loan, you may be able to save money by waiting until interest rates are low.

Wh🎉en the Federal Reserve changes the funds rate, it affects t🎃he costs of other loans, too. Some consumer loans have floating interest rates: When the Fed decides to raise rates, your monthly payment goes up.

The Bottom Line

The Federal Reserve uses its target rate as a monetary policy tool and the impact of a change to the target rate depends on whether you're a borrower or a saver. It's important to read the terms of your financing and savings agreements to determine which interest rates apply to you and determine how a Fed cut can impact your financial situation.