Earlier this week the Federal Reserve Board has been discussing the topic of the American economy. At the end of the meeting they announced the interest rate benchmark is increasing to .75% to 1%. So what does all this mean to the average consumer exactly? Before I dig into that it’s important, or at least I think it’s important, to know what this board does for the American people.
Essentially the job of the Federal Reserve is to serve as an independent entity to stabilize the economy. It was started in 1913 when the economy was barely monitored. Currently Janet Yellen serves as the chair and in total the board has seven members (salary of $179,700).
Random fact but recently the board has hired the first African American CEO of a Fed Bank. It’s great to see not because I’m African American but that the board is focusing on diversity.
Also important to know is there are 12 Fed Banks and they provide services to financial institutions (banks) just as a Wells Fargo would provide services to consumers.
Random note but recently the board has hired the first African American CEO of a Fed Bank. It’s great to see not because I’m African American but that the board is focusing on diversity. We live in a very diverse country and the board that helps control the economy should be a reflection.
Back to the matter at hand. Small banks tend to borrow millions of dollars from Fed Banks and best believe interest is attached to the loan. At their disposal is two main ways to control the economy inflation:
- Lower interest rates that allow banks to have more money on hand to lend to others
- Raise interest rates that allow banks to have less money on hand to lend to others
Very simple concept. Honestly for the average consumer this is more information they need to know. But I know my readers want more information then the average so click here to learn more on the board.
Now that we have that out of the way we can get to the nitty gritty of how the interest rate can affect YOU.
Time to call your credit card company people. The interest percentage you pay on a credit card is based on the prime rate. That same rate is tied to the federal funds. The majority of credit cards have a variable rate which means it is tied to the economy (prime rate). When the interest goes up in the federal funds the credit card companies follow suit in the increase. Banks are allowed to increase the interest rate and will mail a letter stating the increasing if it’s put in place.
On the off chance you have a fixed rate credit card you have no reason to fear, as the rate will remain the same.
Historically when the Federal Reserve increases the interest rate banks will lower the interest rates on a savings account, certificate deposit and money market accounts. I talked about a few alternatives for saving money if you need a suggestion. The interest rates for most savings account are basically non-existent so I can’t imagine many consumer will notice the change. Same thought process for a CD and money market. The rates are higher than a saving account but compared to the early 2000s the rate has been at the bottom for some time now. For consumers who already have a CD they are locked in that rate for the remainder of the term agreement.
Higher interest rates also offer medium loans such as auto loans. For majority of dealership financing it is through a bank that most likely leads to a federal bank as the main lender. The interest rate will be higher for smaller banks and the trickle down effect strikes again. As an example a dealership may charge 4% interest on loans but will likely increase the rate to match the new increase in the federal bank interest. Once again if you a consumer have a vehicle loan already that rate is locked in. If you are looking to purchase with borrowed money I suggest improving your credit score and shopping with credit unions.
Witnessing the increase in the interest rate is exactly what the Federal Reserve is for and does reassure me to an extent. They are the protectors to the economy as Batman is to Gotham. On the bright side this should assure many Americans that they are doing their job to balance the economy and control inflation.
In the next few months the board has stated that there will be more increases with an end goal of 3% interest (which is considered the neutral point). Majority of short-term loans (credit card, auto, CD) will be affected; long-term loans are not based on the prime rate making them somewhat immune. As always, stay informed as always & spread the knowledge.
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