What is the Federal Interest Rate?
If you find it challenging to balance your personal or business books, pity the poor Federal Reserve. This entity is the Federal government’s monetary authority that acts as a central bank and provides reserves of money to private banking institutions. Among this agency’s duties to helping to main the health of the country’s economy by controlling the federal interest rate, sometimes also known federal funds rate. This is accomplished by charging interest rates on cash flowing through the economy and available monies at banks. The Federal Reserve’s (or Fed) intentions are to keep the economy stable and promote steady employment by moving interest rates up or down based on what financial markets are doing. Since a healthy economy with large amounts of money flowing through it can lead to inflation, the Fed will raise its lending interest rates at such times. This reduces borrowing and the amount of money in circulation. If the economy is in a slump and needs to be revitalized with infusions of new money, than the Fed will lower its interest rate. While this raising and lowering of the rate may seem arbitrary, the Federal Reserve looks at a number of factors before making a decision. Moving between raising and lowering rates is also not a process that happens quickly. The period between changes to the rate’s status is known as a “economic cycle” and generally lasts three years.
Why The Federal Reserve Was Expected To Raise The Federal Interest Rate
For almost the last seven years, the Fed has engaged in a “zero interest rate” policy. This was done largely to shore up the collapsing real estate industry after the burst of its “bubble”. After reducing rates, the Fed announced that the intention was to keep that policy in effect through the end of 2014 and possibly beyond. The decision to maintain the interest rate at a particular level for such an extended period of time was a highly unusual and historic decision by the Fed. In some quarters, that policy has resulted in huge returns. The stock market for example, has experienced a protracted “bull” or profitable market for years. But members of Congress and financial experts have warned that these abnormally low rates can discourage private citizens from saving. And the surplus of “easy money” in circulation could lead to product price inflation, further cutting into consumer savings. It has been suggested that the Federal Reserve raise the interest rate to at least 0.75 above percentage point this fall to head this off.
Why The Federal Reserve Isn’t Going To Raise Rates-For Now
On September 17 the Fed’s chairperson, Janet Yellen announced that the agency would be continuing their zero interest policy until the end of 2015, with an actual rate increase, if any, announced at that time. Yellen said that the Fed’s rationale for not increasing rate amounts at this time included a still struggling American economy and a suddenly “bearish” stock market. The suddenly volatile Chinese economy and the global repercussions from it were cited as another factor in leaving the reserve rate alone. As to whether or not a late year rate hike will actually happen, experts are choosing not to lay bets, claiming that they are “shocked” that the Fed made this choice. If a rate increase does happen in December of 2015 don’t be shocked if it’s well below the proposed 0.75 percentage point.