[JahJahBinks]

From time to time I hear this on the news that the Federal Reserve raised the interest rate by x.x%, could someone explain to me what this interest rate is?

 

[Oski]

It's the Fed Fund's Rate:

http://www.econmodel.com/classic/terms/fedfunds.htm

It's one of the tools used by the Fed to control the economy.

 

[jjcha]

Heh, guess Ray beat me to it. Here's another description from the horse's mouth:

http://www.federalreserve.gov/FOMC/

http://www.federalreserve.gov/FOMC/fundsrate.htm

Best,

-Jason

 

[Welly Wu]

In a nutshell, Bernake is following Greenspan's long established model for controlling inflation by making small incremental changes over time. In doing so, he is assuring that the US economy, which is the most stable and wealthiest of all of the democracies in the world, is growing neither too fast which leads to volatility or too slowly which would shunt future growth and expansion. This is the highest at 4.75% federal funds rate since April 2001. His previous hikes have essentially cooled down the housing industry especially new home stats for the past several months which theoretically prevented a massive nationwide housing bubble burst. Bernake is making all of the right moves early in his administration as the Federal Reserve Chairman. I think he will succeed and establish a legacy in his own right next to Greenspan. At least I can understand him when he talks to Congress.

 

[fr4c]

Indeed, recent estate sales have slowed down quite a bit.

 

[1911]

it's a conspiracy by the illuminati to control the world's finances and keep power in the hands of the few.

 

[JahJahBinks]

So this rate has more effect on my bank saving account interest than the mortgage interest on housing?

 

[jjcha]

Heh, while you're actually asking an interesting economics question (the efficiency which which raises in the federal funds rate translates into mortgage markets versus that for savings deposits) the straightforward answer is that it affects both.

Best,

-Jason

 

[JahJahBinks]

lately I have seen a lot of online deposite institutes (such as paypal) offering checking account with 4+% of interest rate. I wonder if this is due to Fed raising interest rate.

 

[jjcha]

Read the second link I posted and you'll start to see the relationship.

Best,

-Jason

 

[Oski]

Quote:

Originally Posted by JahJahBinks So this rate has more effect on my bank saving account interest than the mortgage interest on housing?

The Fed Funds rate is a short term rate (which is more reflective in your savings account or home equity loan). The home equity loan being based on Prime Rates (the rate that banks charge to their most creditworthy customers).

However, general mortgages are 5-yr ARM or 30-yr. fixed, etc. which are long term, and are reflective of longer term instruments such as treasury bonds. Longer tenure debt instruments reflect investor sentiment about inflation, economic growth, strength of the dollar, etc. which translates to how much they are willing to pay for let's say 5-year bonds with a certain rate. The price/rate relationship of the goverment bond auctions result in its yield. Since Treasuries are effectively considered risk free, any other similarly termed fixed income products is essentially a credit spread above the treasury based on the perceived risk/reward by the banks.

 

[jjcha]

Yes, and to finish the loop (pointing at the interesting economics question I asked earlier) one way of thinking of long term rates is that they are expectations of future short term rates. Raises in current short term rates would generally impact expectations on future short term rates in a number of ways, though the efficiency of which is an interesting question. Given the recent inversions in the yield curve, it's clear it's not perfectly efficient and has equal amounts to do with what investors expectations on the future the economic impact of increases in the current short term rate will have.

But I think I just lost the original poster...

Best,

-Jason

 

[JahJahBinks]

wow, this is too complicated.

 

[Welly Wu]

Hey, go to your local public library or bookstore and find Economics and Investing for Dummies or The Complete Idiot's guide books. I am not trying to offend you personally! Those books are good crash courses for people who want an introductory reference book to learn economics, finances, and personal investing. They are written in plain English and they even are funny. You can also find the same information online for free at Investopedia or similiar websites as well; do a search on google. From there, you can start reading Money or Fortune or Kiplinger's Personal Finance magazines for more up to date financial trends that effect people like you and me more directly on a monthly basis. Good thing about learning this stuff is that you are learning the bedrock principles of economics and finance which do not change radically over time. It is worth it if you value your money. Then, you will know what the lingo and buzzwords mean when you turn on your local news channel or even CNBC or Bloomberg.

 

[fearless]

Quote:

Originally Posted by 1911 it's a conspiracy by the illuminati to control the world's finances and keep power in the hands of the few.

Watch out, I saw a guy with a freemason logo as his avatar on here recently.