Finance, Forex and Investments

What are federal reserve interest rates and how do they affect the economy?

I know what the federal reserve is and I know what interest rates are. Now what is a federal reserve interest rate and what the heck does it mean to me?

Public Comments

1. The discount rate is the interest rate banks are charged when they borrows funds overnight directly from one of the Federal Reserve Banks. When the cost of money increases for your bank, they are going to charge you more as a result. This makes capital more expensive and results in less borrowing. Spending decreases, causing it to become more difficult for prices to rise; the opposite being true when capital becomes less expensive due to a decrease in the discount rate<br> <br> The Federal funds rate is the rate that banks charge each other for overnight loans. “Why would one bank borrow cash from another?” you ask. The Fed can require banks to keep a certain percentage of assets in the form of cash on hand or deposited in one of the Federal Reserve banks. From time to time, it will establish a required ratio of reserves to deposits; when this ratio is increased, more cash must be kept in the vault at night, making it more difficult (and expensive) for funds to be acquired. When the reserve requirement is lowered, the money supply is loosened; because less cash has to be kept on hand it becomes easier to acquire capital.<br> <br> The increased (or decreased) cost of acquiring funds is passed on to consumers as banks adjust their prime lending rate (the rate banks charge their best customers) to compensate.<br> <br> I recommend you watch this video online: Fiat Empire.<br> <a href=http://video.google.com/videoplay?docid=5232639329002339531 rel=nofollow>http://video.google.com/videoplay?docid=…</a><br> It clearly explains why the Federal Reserve violates the Constitution and is basically a PRIVATE BANKING CARTEL. You will see how the Fed was formed and who was behind it and what their objectives are in doing so. It also explains very important monetary policies that most people need to know like fractional-reserve banking and the unlimited 'monetization' of debt. If you want to know the biggest culprit of our whole financial mess, look no further than the Federal Reserve.
2. It is approaching zero. It will cause the supply of dollar to increase and flood not only in the US, but also in the world.
3. The biggest effect it will have on you long term, is the national debt. The federal government borrows by selling Treasury securities to foreign governments, retirement funds, investors, etc. http://www.publicdebt.treas.gov/ Even though the interest rates for existing securities are set, they would either have to be paid off, or re-negotiated at maturity. An increase of just 1% on a $14 trillion debt, would be a disaster. Either ALL taxes on everyone would have to be increased significantly, or the money supply would have to be increased by the Fed monetizing the debt. Which would be taxation through inflation.