Federal Funds Rate explained: What is it and why is it important?

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Americans will anxiously be waiting to see what will happen to interest rates in the US as a pivotal announcement is expected on Wednesday morning.

The Federal Open Market Committee is due to announce whether it will be raising interest rates once again later today.

In the past year, the committee has opted to raise rates multiple times in a bid to rein in inflation.

But, following yesterday’s drop in CPI inflation, experts believe the Federal Reserve’s wave of interest rate hikes could soon come to an end.

Many Americans will be unaware of what exactly the Federal Funds rate is and how it impacts their loans, mortgages, and credit cards, so Express US has compiled everything you need to understand about rate rises.

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Federal Reserve

What is the Federal Funds rate?

Otherwise known as the Fed rate, this is the interest rate that American banks pay one another to borrow or loan money overnight.

Decisions regarding the rate are set by the FOMC which meets eight times a year to make potential hikes or pauses to it.

The Federal Funds rate also impacts interest rates on everyday consumer products, including credit cards, mortgages and loans.

Banks need to keep a minimum amount of cash in reserves, so financial institutions with excess reserves usually loan money to banks which are unable to meet this requirement.

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Federal Reserve Chair Powell Speaks During The Thomas Laubach Research Conference

How has the Federal Funds rate changed?

As it stands, the central bank’s interest rate is between the range of five percent to 5.25 percent.

Over the COVID-19 pandemic, the Federal Funds Rate was sitting at zero percent for more than a year.

Since March 2022, interest rates have been rising to the highs they are today as Fed struggles to combat inflation.

A consequence of this has been that people’s mortgage, loan and credit card repayments have gone up over the period.

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May’s Inflation Numbers To Be Reported Tuesday Ahead Of The Fed’s Interest Rate Meeting

Who changes the Federal Funds Rate?

Interest rate decisions are determined by the FOMC, which is a 12-member group of banking leaders.

The committee meets eight times a year to make potential changes, including increases and decreases.

Here is a list of who participates in the FOMC:

  • Jerome H. Powell, Board of Governors, Chair
  • John C. Williams, New York, Vice Chair
  • Michael S. Barr, Board of Governors
  • Michelle W. Bowman, Board of Governors
  • Lisa D. Cook, Board of Governors
  • Austan D. Goolsbee, Chicago
  • Patrick Harker, Philadelphia
  • Philip N. Jefferson, Board of Governors
  • Neel Kashkari, Minneapolis
  • Lorie K. Logan, Dallas
  • Christopher J. Waller, Board of Governors

Will the Federal Funds Rate be raised again?

CPI inflation fell to four percent in the US, according to data released by the Bureau of Labor Statistics (BLS).

As such, experts such as Truflation’s head of product Oliver Rust believe the Fed will likely put a stop to the constant rate hikes.

He explained: “The BLS inflation release and FOMC meeting are a little too close to each other for comfort, so policymakers will have to think on their feet when it comes to their next interest rate decision.

“However, as US inflation gets closer to the two percent target, we expect the Central Bank will finally hit the pause button on rate hikes and allow the economy to take a much-needed breather.”

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