Fed Funds Rate and Its Effect on Bank Rates
The Federal Reserve has gotten a lot of attention lately and, just a few days ago, announced that it would not be raising the Fed funds rate for the foreseeable future. How will this affect bank rates? Let’s look at this today on Online Banks Blog.
Federal Reserve is the apex regulatory authority in the United States and controls interest rates and other features of banking and financial industry. Fed funds rate is determined after taking into account all the conditions and factors playing their role. These rates are determined by the Federal Open Market Committee that meets eight times a year with an average gap of seven weeks. The committee can convene additional meetings in case of extraordinary financial situation.
The bank rates determined by the committee are binding on all financial institutions working in the US. Each bank is required under federal laws to keep a certain percentage of reserves that can be used in inter-bank and federal borrowing. These reserves are around 10% of a bank’s demand accounts.
Federal Reserve funds rate is determined after consultation with the banking authorities. These rates are subject to quick fluctuations and have hardly remained the same even within a year. Economic situation plays the crucial role in determining these rates and capital raise and other issues also come into play. Fed funds rate do not have a direct impact on ordinary customers though they can impact a bank’s services in the longer term. Many people hedge their bets on this rate and stock markets have always played an important role in influencing the course of economy based on Fed funds rate. Federal Reserve exercises significant control over banks through these rates and can outright stop inter-bank lending.
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