For the first time in 9 months, the Federal Open Market Committee (FOMC, or Federal Reserve) decided not to lower the Fed funds rate. The Fed funds rate remains steady at 2%. Is that good or bad? What does it mean for consumers? Staying on top of the major financial news like this can help you when maintaining a healthy budget.
Do you have credit cards? Chances are you have a card with an interest rate that is tied to prime rate. Prime is three percentage points greater than the Fed funds rate (2.0% + 3.00% = 6%). When the Fed is lowering, you can secure better interest rates on your credit cards.
What's the buzz about mortgages? The Fed funds rate also affects short-term interest rates such as those on adjustable-rate mortgages (ARM) and home equity lines of credit. However, the Fed's decision has less of an effect on long-term rates, like a standard 30-year fixed home loan. Long-term rates are more determined by the people that buy and sell in the bond market every day. If you prefer the security of a fixed-rate, they are still, historically speaking, very low.
Other effects? The Fed's rate also helps determine the rate for your savings account. If they raise, you benefit. If they lower, you earn less interest.
The Fed's overall goal is to keep the economy growing while fending off excessive inflation. So, while the recent drops in the Fed funds rate helped to stimulate the economy during the credit crunch, the lack of change today indicated that the Fed is focused on slow, steady growth while watching inflation.
If you think you're paying too much interest on your credit cards or mortgage and not earning enough on your savings, register for Begin a Budget today. You have nothing to lose and only money to gain!
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