Unless you have a job related to finance, you probably aren’t closely following the rate changes made by the Federal Reserve. When the news transitions to stories regarding “the Fed,” most tend to drown it out or change the station. However, whether you’re paying attention or not, these rates impact our lives in a variety of ways.
Without getting into an entire econ class, this blog gives you a short overview of the Fed and reasons why you should be paying attention. We’ll also give you a few examples of how decisions made by the Federal Reserve should influence the decisions you make regarding your own personal finances.
First off, some definitions are in order. The Federal Reserve System, or “the Federal Reserve” or simply “The Fed” is the central banking system in the United States. The Fed plays a lot of roles, one of which is establishing a target for the federal fund rate to maintain the stability of our financial system.
The federal fund rate is simply the interest rate banks charge other banks for lending money. This rate is also used as a benchmark for a number of customer interest rates. Of course, those are just the basics. There a many aspects to how, why and when these rates are changed. But you don’t have to be a financial wizard to make smart decisions based on the federal fund rate. Here are three examples of how this rate affects your personal finances.
Credit Card Rates
The federal fund rate affects short-term interest rates; this can impact the interest paid on credit cards. What most credit cards charge is tied to the prime interest rate, which is about 3-percentage points above the federal funds rate. The Fed will move this rate higher in order to slow down inflation. It’s important to take a look at this number when opening a new credit card account.
Home Equity Loans
While the Federal Reserve can indirectly influence mortgages, market forces are the primary driver of mortgages rates. You should consider this when applying for a home loan. However, your home equity line of credit, often called a HELOC, is directly related to the prime rate. When the Fed raises it, HELOC rates increase as well.
In addition to short-term interest rates, the federal funds rate also influences a medium-term fixed loans. This is the type of loan you’d typically get for a car loan. If the Fed increases the federal funds rate, it will increase the prime interest rate, which could cause your lender to offer these loans at a higher rate. The good news is when you agree to a loan with a fixed rate, those rates are locked in forever and can’t be changed. The same is true for student loans and other fixed-rate loans.
Keeping a close eye on the federal fund rate can give you an idea of when the best time is to get a loan or refinance existing loans. At Legacy National Bank, we take pride in offering the best loan rates in NWA. Come by for a chat at any of our locations to discuss how we can help you make the best decisions for your future.