Why the Fed Funds Rate Matters to You

Why the Fed Funds Rate Matters to You

The fed funds rate is the primary tool the Federal Reserve uses to manage the U.S. economy. It directly influences interest rates on credit cards, personal loans, and variable-rate mortgages. It does this through the Federal Open Market Committee (FOMC) which meets eight times per year.
The Fed promotes economic stability by raising or lowering the cost of borrowing. If the economy is slowing, the Fed lowers interest rates to make it cheaper for businesses to borrow money, invest, and create jobs. Lower interest rates encourage consumers to borrow and spend more, spurring the economy. On the other hand, if the economy is growing too fast, causing inflation, the Fed raises rates to curb spending and borrowing.
The fed funds rate also affects the money supply. When the rate is low, it encourages lending, borrowing, and business activity. This adds to the money supply. A higher rate, on the other hand, discourages lending and decreases the money supply.

Record Highs and Lows

The record high was 20% in 1980 and 1981. Fed Chair Paul Volcker used it to combat double-digit inflation. This created a recession, but stopped inflation in its tracks. 
The record low first occurred in 2008. Fed Chair Ben Bernanke lowered it 0.25% on December 16 to fight the financial crisis. It stayed there until December 17, 2014, when Fed Chair Janet Yellen raised it once the threat of a renewed recession was safely over.

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