The Federal Reserve Bank of the United States (the Fed) has been hinting for the last several months that it will raise interest rates. The interest rate that would be raised is the federal funds rate. The federal funds rate is the interest rate charged by a bank on an over-night loan of funds to another bank. Low interest rates help improve bank balance sheets and banks’ capacity to lend. “By keeping short-term interest rates low, the Fed helps recapitalize the bank system by helping to raise the industry’s net interest margin (NIM), which boosts its retained earnings and, thus, its capital.” (St. Louis Federal Reserve).
To help you understand the issues currently surrounding the ongoing trepidation of “Wall Street” to the Fed raising the federal funds rate, I’m including several links discussing the dilemma/situation. The act of raising the federal funds rate is and will be a big thing because of our current economic situation and the longevity of time –almost ten (10) years! –since the federal funds rate was driven down to about zero percent! That’s why if you have a savings account or a money money or a CD, that money is earning, or should I rather say NOT EARNING any real interest for you.
Following are some websites to help explain the Why, Wherefore, What, and What if of the Fed manipulating interest rates via use of the federal funds rate.
Here’s the question “When will the Fed Raise Rates?” poised by Kevin Granville of the New York Times: When will the Fed raise rates? There is also a very short video by Andrew Sorkin, Aaron Byrd and Erica Berenstein located on that webpage.
The Fed has a Board of Governors (more about that in another post). This link refers to Dennis Lockhart, Governor of Atlanta Federal Reserve Bank. This article gives you an idea of the thinking involved in raising, lowering, or as in the past several years keeping the federal funds rate at a specific “rate.” This article appeared in the Wall Street Journal.
Finally, an article from the St. Louis Federal Reserve Bank entitled: Low Interest Rates have Benefits …and Costs.