Eye Crosser #3: Interest Rates

If you don’t know where you are going, you might wind up someplace else.

Yogi Berra

Yogi Berra. (n.d.). BrainyQuote.com. Retrieved July 29, 2015, from BrainyQuote.com Web site: http://www.brainyquote.com/quotes/quotes/y/yogiberra391900.html

The American stock market has been anticipating the Federal Reserve Bank (the Fed) raising its Fed Funds Rate for several years at this point. And what a point it is…..how about nine (9) years since the rate has been cut to its current low rate. Let’s not quibble, the current Fed funds rate is and has been about ZERO % for this long length of time. The American saver has literally only earned pennies on thousands of dollars of savings. On the other hand, anyone borrowing money has NOT paid a very high interest rate on loans. In fact, people have been able to buy cars at ZERO % interest. Now if the borrower isn’t paying any interest, how can the saver EARN any interest.!!! Talk about a “Catch 22.”

catch-22. (n.d.). Dictionary.com Unabridged. Retrieved July 29, 2015, from Dictionary.com website: http://dictionary.reference.com/browse/catch-22

I wanted to give a fairly simple definition of the Federal Funds Rate and how it affects the American economy and perhaps the global economy. As I’ve discovered, there is no “fairly simple” explanation because the Fed funds rate is used in conjunction with other monetary policy rates to regulate the U.S. banking system. I can say that “basically” the Fed funds rate is an overnight rate used to determine the amount of amount charged to banks to borrow money literally “overnight”. The Investopedia website has a short animated presentation to explain the difference between the Federal Funds Rate and the Discount Rate. Be sure to scroll down the page a little to find the animation. Both rates may be used to manipulate interest rates.

What are the tools of U.S. monetary policy?

“Because the recent recession was so severe, the Fed used a number of extraordinary monetary policy tools that are not part of its traditional toolkit.” On the Federal Reserve Bank of San Francisco’s website, there is a definition of the monetary tools used to contain the economic disaster staring the U.S. Government and U.S. banking institutions in the face. The usual tools include: open market operations, the discount rate, reserve requirements and interest on reserves.

Here’s another article about interest rates: Difference between Federal Funds rate and Discount Rate

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