• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

The College Investor

Student Loans, Investing, Building Wealth

  • About
  • Podcast
  • Research
  • Contact
  • Save For College
      • How To Start

      • How To Save For College
      • How To Pay For College
      • What Is the Average Cost of College?
      • What Is A 529 Plan and Where to Open One in Your State
      • How Much Should You Have In A 529 Plan By Age
      • How To Use A 529 Plan For Private Elementary And High School
      • What Are Qualified Expenses For A 529 Plan (And What Doesn’t Count)?
      • The Best Brokers To Open A 529 Plan
      • Tools + Accounts

      • 529 Plans: The Ultimate College Savings Plan
      • 529 Plan Contribution Limits
      • Prepaid Tuition Plans | What To Know
      • Understanding And Using 529A ABLE Accounts
      • Using A Roth IRA To Save And Pay For College
      • FAFSA Deadlines for Financial Aid
      • CollegeBacker Review
      • Upromise Review
      • UNest Review
      • Other Options

      • Student Loan And Financial Aid Programs By State
      • The Guide To Military And VA Education Benefits
      • How To Fill Out The FAFSA
      • How To Find College Scholarships
      • The Best College Scholarship Search Websites
      • How To Find Grants To Pay For College
      • Pell Grants: What They Are And How To Qualify
      • Understanding Federal Work-Study
      • How To Use A 529 Plan If Your Child Doesn’t Go To College
  • Student Loans
      • Borrowing

        • How Student Loans Work
        • How To Apply For A Student Loan
        • Best Student Loans And Rates In January 2023
        • 10 Best Private Student Loans Of January 2023
        • Best Student Loans To Pay For Graduate School
        • Best Student Loans To Pay For Medical School
        • Parent Loans To Pay For College
        • No-Cosigner Student Loan Options
        • Guide To Income Sharing Agreements (ISAs)
        • Best International Student Loans
      • Get Out Of Debt

        • Best Student Loan Refinance Companies In January 2023
        • Best Student Loan Repayment Plans
        • Best Student Loan Refinancing Bonuses And Promotional Offers Of January 2023
        • Student Loan Forgiveness Programs (The Complete List)
        • The Full List Of Student Loan Forgiveness Programs By State
        • Public Service Loan Forgiveness (PSLF)
        • Top Student Loan Scams
        • Average Student Loan Monthly Payment
        • Average Student Loan Debt By Year
      • Reviews

        • Credible Review
        • Splash Review
        • Ascent Review
        • Citizens Bank Review
        • Commonbond Review
        • Earnest Review
        • ELFI Review
        • Laurel Road Review
        • LendKey Review
        • SoFi Review
  • Investing
      • How To Start

        • How To Start Investing in High School
        • How To Start Investing In College
        • How To Start Investing In Your Twenties For 22 – 29 Year Olds
        • How To Start Investing In Your 30s For 30 – 39 Year Olds
        • How To Start Investing With $100 Or Less
        • How To Give Kids The Gift Of Stock
        • What Is Dividend Growth Investing
        • IRA Rollover Chart
      • Tools + Accounts

        • Best Online Stock Brokers
        • The Best Traditional And Roth IRA Accounts
        • The Best Robo-Advisors
        • The Best Investing Apps
        • The Best Places to Trade Options
        • The Best Places To Open A Health Savings Account
        • The Best Solo 401k Providers
        • The Best Self-Directed IRA Providers Of 2023
        • Best Cryptocurrency Exchanges
      • Reviews

        • Vanguard Review
        • Fidelity Review 2023
        • M1 Finance Review
        • TD Ameritrade Review 2023
        • Charles Schwab Review
        • Robinhood Review
        • Webull Review
        • Betterment Review 2023
        • Wealthfront Review
  • Earn More Money
      • Extra Income

        • 20 Best Side Hustles You Can Start Earning With In 2023
        • 53 Side Hustle Ideas To Make Money Fast
        • 100 Ways To Make Money In College
        • 80 Ways To Make Money From Home In 2023
        • 5 Quick Money Making Ideas (That Take Less Than 1 Hour)
        • 10 Interesting Ways You Can Make Money Driving
        • High-Paying Side Gigs That Earn $1,000 or More Per Month
        • The 10 Best Money-Making Apps
        • Paid Surveys: Earn Money For Giving Your Opinion Online
        • 10 Crazy Ways To Make $10,000 You’ve Never Heard Of
      • Build Wealth

        • 40 Passive Income Ideas You Can Use To Build Wealth In 2023
        • 3 Ways To Make $50,000 Per Year Without Working With Passive Income
        • How To Become A Real Estate Investor With Just $500
        • 15 Best Online Business Ideas
        • Residual Income: 7 Super Smart Ways to Build It
        • The Most Common Multiple Income Streams
        • How To Become A Real Estate Mogul With Only $10,000
      • Reviews

        • Fundrise Review
        • RealtyMogul Review
        • FarmTogether Review
        • AcreTrader Review
        • Swagbucks Review
        • Survey Junkie Review
        • TopCashback Review
        • DoorDash Review
  • Personal Finance
      • Banking

        • 10 Best High Yield Savings Accounts Of January 2023
        • 10 Best Money Market Accounts Of January 2023
        • 10 Best Free Checking Accounts In January 2023
        • Best Bank CD Rates Of January 2023
        • 10 Best Business Checking Accounts In January 2023
        • Best Online Banks Of January 2023
        • Best Credit Unions Nationwide Of January 2023
        • Best College Student Checking Accounts Of January 2023
      • Insurance

        • Best Life Insurance Companies
        • Renters Insurance
        • Car Insurance
        • Pet Insurance
        • Umbrella Insurance
        • Disability Insurance
        • Tuition Insurance
        • Travel Insurance
      • Credit Tools

        • Best Budgeting Apps
        • Cash Advance Apps
        • How To Get A Free Credit Score Report
        • Best Credit Monitoring Services For 2023
        • Debt Settlement: Inside The Secret World
        • Credit Repair Explained: Should You Pay For Help?
        • Best Personal Loan Companies And Lenders
        • Online Loan Companies To Borrow From Home
      • Tax

        • Best Tax Software
        • Free Tax Software
        • IRS Tax Refund Calendar
        • Common IRS Questions and Errors
        • Federal Tax Brackets
        • Capital Gains Tax Brackets
        • 401k Contribution Limits
        • IRA Contribution Limits
        • HSA Contribution Limits
  • Forum
  • Search
Home » Banking » Federal Reserve Fed Funds Rate

Federal Reserve Fed Funds Rate

Updated: December 14, 2022 By Robert Farrington

Tweet
Share3
Share
Pin20
Email
Print

At The College Investor, we want to help you navigate your finances. To do this, many or all of the products featured here may be from our partners. This doesn’t influence our evaluations or reviews. Our opinions are our own. Any investing information provided on this page is for educational purposes only. The College Investor does not offer investment advisor or brokerage services, nor does it recommend buying or selling particular stocks, securities, or other investments. Learn more here.Advertiser Disclosure

There are thousands of financial products and services out there, and we believe in helping you understand which is best for you, how it works, and will it actually help you achieve your financial goals. We're proud of our content and guidance, and the information we provide is objective, independent, and free.

But we do have to make money to pay our team and keep this website running! Our partners compensate us. TheCollegeInvestor.com has an advertising relationship with some or all of the offers included on this page, which may impact how, where, and in what order products and services may appear. The College Investor does not include all companies or offers available in the marketplace. And our partners can never pay us to guarantee favorable reviews (or even pay for a review of their product to begin with).

For more information and a complete list of our advertising partners, please check out our full Advertising Disclosure. TheCollegeInvestor.com strives to keep its information accurate and up to date. The information in our reviews could be different from what you find when visiting a financial institution, service provider or a specific product's website. All products and services are presented without warranty.

federal funds rate

You have likely seen most of the major high yield savings accounts raising their rates. And you may have heard of something called "The Fed", which raises and lowers interest rates.

But how does it all work? Why does what the Fed do impact savings rates, credit card rates, even mortgages? 

Well, it's a pretty complex system, but let's try to break it down. We're going to cover what the Fed is (i.e. The Federal Reserve), how the Federal funds rate works, and how it impacts consumer loans and banking.

Table of Contents
Who Is the Fed?
What Is the Federal Funds Rate?
How Does the Federal Funds Rate Affect Me?
Negative Interest Rates
Final Thoughts

Who Is the Fed?

Fed stands for the Federal Reserve, which is the central bank of the United States. Congress created the Fed in 1913 in response to the 1907 stock market panic. The Fed’s mission, as stated on its website at https://www.federalreserve.gov, is to provide the nation with a “safe, flexible, and stable monetary and financial system.”

The Fed includes the board of governors in Washington D.C., which has seven members. All members are appointed by the president of the United States and confirmed by the senate.

There are 12 Fed banks located throughout the U.S. Their job is to gather economic data to help the Fed make effective monetary policy decisions.

The Fed conducts monetary policy through two primary functions:

  • Influencing interest rates
  • Controlling availability of money and credit

Congress has mandated that the Fed promotes maximum employment and stable prices.

Monetary policy decisions are made by the FOMC, which stands for the Federal Open Market Committee. The FOMC meets nearly every month of the year to provide updates on the economy’s health. During any of these meetings, the Fed may change interest rates. Sometimes the Fed will change interest rates between meetings. Interest rates refer to the federal funds rate, which is the topic of the next section.

There are many other functions that the Fed performs. However, they are outside the scope of this article.

What Is The Current Federal Funds Rate?

In short, the federal funds rate is the overnight interest rate that banks charge each other (i.e., interbank loans). The Fed sets a reserve requirement that banks must adhere to. When a bank’s reserves get low, it will borrow from other banks to add more reserves. Although there are other reasons, banks lend and borrow from each other.

When rates are low, banks borrow more from each other. The opposite is true when rates are high.

If the economy is growing, the Fed may decide to raise rates so the economy doesn’t overheat. The Fed raises rates by buying or selling Treasury bonds, which affect the money supply and credit conditions.

At a macro level, low rates can cause investors to look overseas for better returns. This outflow of money decreases the demand for the dollar and lowers its value. A lower dollar impacts exports of foreign countries into the U.S., as their goods now cost more in the U.S. The end result is that exports from foreign countries decrease.

Here's the current Federal Funds Rate as of January 29, 2023:

Header

Current

One Month Ago

Last Year

Fed Funds Rate

4.50%

4.00%

0.25%

How Does the Federal Funds Rate Affect Me?

How does a move in the federal funds rate affect consumers?

When banks are able to lend to each other at low rates, other interest rates in the economy are generally low as well. Consumers have easy access to credit and are able to borrow more and thus spend more. For those with a HELOC that has an adjustable rate, those rates will adjust down. This can encourage more people to use lines of credit on their home, thus increasing consumer spending.

Low rates also cause investors to seek higher returns in the stock market, pushing up stocks (since low rates also mean keeping your money in a savings account earning 0.25% isn't as attractive as other options). This causes retirement accounts to grow, leaving consumers with a feeling of being more wealthy. When consumers have a positive outlook on their wealth and the economy, they tend to spend more.

As the federal funds rate increases, it has a trickle-down effect.

Consumer spending makes up nearly 68% of U.S. GDP. As the consumer slows down, so does the economy.

Banks feel the pinch of increased rates as well. Lending between banks slows. To continue making a profit, banks must increase loan rates for businesses and consumers. This increase in loan rates tightens credit. The end result is that businesses and consumers are less willing to borrow money at a higher cost.

Ultimately, car loans, credit card rates, HELOCs, and mortgages move with the federal funds rate. This relationship doesn’t always work. Earlier this year, as the Fed cut interest rates, mortgage rates continued to go up. There are many other complex dynamics that can cause the relationship between the federal funds rate and loan rates to break.

Negative Interest Rates

You may have heard of negative interest rates potentially occurring (and they already exist in some parts of the world). Negative interest rates are typically viewed poorly - they mean that the economic system has really stalled, and the Fed is trying to force banks to lend versus keep their money safe.

The idea is that if a bank is forced to pay money to keep their extra money safe (the negative interest rate), versus lend it or spend it, the bank would choose to lend it or spend it. What does this look like?

Let's say that the Fed is requiring a -0.25% interest rate. If a bank wanted to save $1billion overnight, the bank would have to pay almost $7,000 in interest fees (versus receiving the interest). That may not sound like a lot, but that's $2.5 million in additional fees per billion dollar saved. That can add up. 

Consumers wouldn't really see the effect of negative interest rates unless they went extremely negative. The reason is that banks charge a spread (their profit and overhead) on what they borrow and what they lend.

So, for consumers, they typically pay 3-5% more (on the low end for highly qualified borrowers) that the Federal Funds Rate. 

Final Thoughts

Understanding how the federal funds rate works is helpful in knowing where overall loan rates are going. But as mentioned above, the correlation doesn’t always work. Additionally, sometimes, the Fed makes policy mistakes.

In December of 2018, the Fed raised rates by 0.25% as the market was crashing. Although the Fed raised rates three other times in 2018, it had to start decreasing rates in 2019 — with two 0.25% decreases so far. Many consider the December 2018 rate hike a mistake by the Fed. Fast forward to today and the Fed is aggressively raising rates to fight inflation - which some say will trigger a recession.

As a consumer, it’s good to know and understand what the Fed is doing, although it may not always be actionable information.

Robert Farrington
Robert Farrington

Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.

He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.

He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.

Federal Reserve Fed Funds Rate

Editor: Clint Proctor

Editorial Disclaimer: Opinions expressed here are author’s alone, not those of any bank, credit card issuer, airlines or hotel chain, or other advertiser and have not been reviewed, approved or otherwise endorsed by any of these entities.
Comment Policy: We invite readers to respond with questions or comments. Comments may be held for moderation and are subject to approval. Comments are solely the opinions of their authors'. The responses in the comments below are not provided or commissioned by any advertiser. Responses have not been reviewed, approved or otherwise endorsed by any company. It is not anyone's responsibility to ensure all posts and/or questions are answered.
Subscribe
Connect with
I allow to create an account
When you login first time using a Social Login button, we collect your account public profile information shared by Social Login provider, based on your privacy settings. We also get your email address to automatically create an account for you in our website. Once your account is created, you'll be logged-in to this account.
DisagreeAgree
Notify of

I allow to create an account
When you login first time using a Social Login button, we collect your account public profile information shared by Social Login provider, based on your privacy settings. We also get your email address to automatically create an account for you in our website. Once your account is created, you'll be logged-in to this account.
DisagreeAgree

0 Comments
Inline Feedbacks
View all comments

Primary Sidebar

Featured Bank Reviews

>  CIT Bank (recommended)
>  Discover  (recommended)
>  Barclays
>  Chime
>  Chase Bank
>  American Express Savings
>  Axos Bank
>  Quontic Bank

Checking Accounts

  • Best Free Checking Accounts
  • Best High-Yield Checking Accounts
  • Best College Student Checking Accounts
  • Best Starter Checking Accounts For Kids
  • Best Teen Checking Accounts
  • Best Checking Accounts for Military Members
  • Second-Chance Checking Accounts

Savings Accounts

  • Best High Yield Savings Accounts
  • Best Money Market Accounts
  • Best Student Savings Accounts

Certificates Of Deposit

  • Best No-Penalty CDs Rates
  • Best 12 Month CD Rates
  • Best Jumbo CD Rates
  • Best Overall Bank CD Rates

Business Banking

  • Best Business Checking Accounts
  • Best Business Savings Accounts

More On Banking

  • Best Bank Bonus Offers
  • Best Free Online Banks
  • Best Credit Unions
  • Best Banks For Students
  • Best Bank Accounts To Get Your Tax Refund Or Direct Deposit Early

Footer

Who We Are

The College Investor is an independent, advertising-supported financial media publisher, focusing on news, product reviews, and comparisons.

Connect

  • Contact Us
  • Advertise
  • Press & Media

About

  • About
  • Our Team
  • Podcast
  • Editorial Guidelines
  • How We Make Money
  • Archives

Social

Copyright © 2023 · The College Investor · Privacy Policy ·Terms of Service · DO NOT Sell My Personal Information

wpDiscuz