- Changes in the federal funds rate can influence the interest rates consumers pay on loans, such as mortgages, auto loans, and personal loans. When the Federal Reserve raises the federal funds rate, banks may increase the interest rates on loans for consumers.
- Credit card interest rates are often tied to the prime rate, which is influenced by the federal funds rate. If the federal funds rate goes up, credit card interest rates may also increase.
- The federal funds rate affects the cost of borrowing for businesses. When the Federal Reserve raises interest rates, businesses may face higher costs for loans, impacting capital investments and expansion.
Adjustable-Rate Mortgages (ARMs)
- ARMs have interest rates that can change periodically based on changes in a related financial index, often tied to the federal funds rate. As the federal funds rate rises, so might the interest rates on ARMs.
It’s important to note that the Federal Reserve’s decisions on interest rates are part of its monetary policy tools to achieve its dual mandate of stable prices and maximum sustainable employment. The Federal Open Market Committee (FOMC) meets regularly to assess economic conditions and determine whether adjustments to the federal funds rate are necessary.