What Is the Federal Funds Rate?

The federal funds rate, often referred to as the fed rate, is the interest rate at which central banks lend money to each other overnight. This rate is set by the Federal Reserve, which aims to manage inflation and maintain economic stability in the U.S.

During economic downturns, such as the early days of the pandemic, the Federal Reserve typically lowers the fed funds rate to make borrowing cheaper, thereby stimulating spending, business expansion, and economic growth. Conversely, when inflation rises, the Fed increases the rate to make borrowing more expensive, encouraging reduced spending to temper inflation.

How Does the Fed Rate Impact Savings Accounts?

When the Federal Reserve raises the federal funds rate, interest rates on savings accounts often increase as well. For instance, in January 2022, the average savings account rate was just 0.06% nationally. By the end of 2022, after several rate hikes, the average rate had risen to 0.35%, with some online accounts offering annual percentage yields (APYs) of over 3%.

This means that savers can earn more on their deposits when the fed rate is higher. For example, if you have $10,000 in a savings account earning 3% APY, your balance would grow to $10,304.53 after 12 months, assuming no additional deposits or fees.

How Does the Fed Rate Impact Interest Rates for Borrowing?

The fed funds rate also influences the prime rate, which is used as a base to set consumer loan rates. For example, the prime rate increased from 3.50% in March 2022 to 8% in March 2023, leading to higher rates on consumer products such as personal loans and credit cards.

In the first quarter of 2022, the average interest rate on a 24-month personal loan was 9.39% APR, which jumped to 11.23% APR by November 2022. Similarly, the average interest rate for credit cards increased from 16.17% to 20.40% during the same period.

How to Take Advantage of the Fed’s Rate Increases

While higher fed rates can be challenging for borrowers, they present opportunities for savers. Here are some strategies to make the most of the fed funds rate increases:

• Open a high-yield savings account: Higher APYs can significantly grow your savings. For instance, a $10,000 deposit in a savings account earning 3% APY can yield over $300 in a year.
• Explore other interest-earning accounts: Consider locking money into a certificate of deposit (CD) or a money market account to benefit from higher rates.
• Eliminate credit card debt: Paying off variable-rate debt like credit cards can help you avoid higher interest charges. Consolidating debt with a low-interest personal loan or a balance transfer card offering a 0% introductory APR can also be beneficial.

Why Choose O1ne Mortgage?

At O1ne Mortgage, we understand the complexities of the financial market and are here to help you navigate through them. Whether you’re looking to save more effectively or need assistance with borrowing, our team of experts is ready to provide personalized solutions tailored to your needs.

Contact us today at 213-732-3074 for any mortgage service needs. Let us help you make the most of your financial opportunities.