The Fed, specifically, the Federal Open Market Committee (FOMC), ends their two-day meeting today with a decision on what they will do with interest rates. I just wanted to clarify what that means for us and our economy.
When the FOMC changes interest rates, they aren’t changing every rate out there. They are only changing the Federal Funds Rate (FFR). This is the rate that banks charge each other for overnight loans. Modifying this rate is one of the Fed’s tools that they use to maintain a healthy economy. They lower it if they feel the economy is slowing and raise it if the economy is heating up too quickly.
Although you probably have never heard of the Fed Funds Rate, it does influence many of the interest rates that you are familiar with and interact with every day. Here’s a table that shows what is expected with various rates and other economic factors when the FOMC changes the Fed Funds rate:
| When FOMC raises the FFR, plan on: | When FOMC lowers the FFR, plan on: | |
| Mortgage rates | Higher | Lower |
| Car loan rates | Higher | Lower |
| CD rates | Higher | Lower |
| Money market rates | Higher | Lower |
| Credit card rates | Higher | Lower |
| Business profits | Lower | Higher |
| Stock market | Lower | Higher |
| Consumer spending | Lower | Higher |
| Home sales | Lower | Higher |
These expected changes don’t happen overnight. It takes time for the Fed’s actions to trickle down to other rates and markets. For instance, if the Fed raises the FFR, the stock market might not go down until rates are high enough in other investments, such as bonds or CDs, to justify the shift from stocks to those other investment options.
This should give you a better understanding of what is happening when you hear that the Fed is changing interest rates.
Shoot me an email if you have any questions.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
