What is "the Fed" and how do rate changes affect you?

May 19, 2022

Understanding the raising rate environment.

You might have seen some things in the news recently about “the Fed” raising rates, but many Americans don’t know exactly what the Fed is or how it affects their lives. Turns out, it has a pretty big impact on all of us. 

 

The Federal Reserve System (commonly known as the Fed) is the central banking system of the USA. It’s comprised of twelve banks throughout the country – but it’s not the kind of bank you or I could just walk into to cash a check. The Fed focuses more on the overall financial health of the country than the banking needs of individuals. It’s the organization tasked with maintaining the financial stability of the US and its economy. 

 

When you hear that the Fed plans to raise rates, the rate you’re hearing about is the Federal Funds rate. The Federal Funds rate is the interest rate banks charge other banks to lend funds to each other. When this rate rises, big banks make up for it by raising what’s called the Prime rate. Prime is the interest rate given to favorable consumers for auto loans, credit cards, mortgages, and more. 

 

Lots of financial institutions, like Towpath Credit Union, use Prime as a benchmark for rates on lending products. When the Prime rate changes, you’ll see many rates at Towpath CU change as well. 

 

So how does the Federal Funds rate trickle down to me? 

 

Part of the Fed’s responsibility is to moderate long-term interest rates in our economy. It does this by raising and lowering the Federal Funds rate at strategic times. 

 

If economists predict an approaching recession, the Fed might want to give the economy a boost by lowering the Federal Funds rate. This would cause a ripple effect throughout the economy: banks can lend more money out at lower rates so businesses and consumers could borrow more, the housing market would improve, and consumer spending would increase, all stimulating the economy. 

 

As a result of the previous trend towards recession, the Fed lowered rates during the Covid-19 pandemic. As we begin to see a shift back towards normalcy, the Fed has begun to raise rates to look more like they did pre-pandemic. Despite the change in rates, you can always count on your Towpath Credit Union to be here for when your dreams need us!