How the Federal Reserve Interest Rate Change Affects You
Some people think that banks hold all the power when it comes to increasing or decreasing interest rates on things like checking or savings accounts. Instead, the Federal Reserve (“The Fed”) sets a target for the fed funds rate (the interest rate in which banks charge each other for overnight loans) and while banks can by law set any rate they want, they are heavily influenced to stay at or near the fed funds rate. Banks need to use fed funds to meet their federal reserve requirement each night if they don’t have enough reserves.
When the fed rates rise or fall, they can have a significant impact on consumers. In March 2020, in response to the global Covid-19 pandemic, the Federal Reserve announced that they are decreasing the interest rate.
How did the decrease in interest rate affect you?
When rates go down, it becomes cheaper to borrow, making purchases on credit cards for home mortgages or auto loans more affordable. On the other side, saving becomes less appealing due to the smaller interest earned. Many banks were forced to drop their interest rates significantly. What should you expect when the rates go back up? Although we may not be exactly sure when the rates are going to go back to normal, it is important to understand how both smaller and bigger interest rates affect you financially. When rates rise, there is more to gain when you save. Whether you put your money in a savings account or an interest-bearing checking account, you get the most out of this rate when you have a larger balance.
While there is nothing you can do to control the Federal Reserve’s rate changes, it is helpful to know why it matters to you as a consumer. Altering your behavior depending on the current rate can help you save money and better prepare for the future.