You might be wondering, “What does this have to do with me? Isn’t this a bank thing?”

While it most certainly is a bank thing, the Federal Funds Rate has a huge affect upon the U.S. economy, the world economy and yes, you.

The Basics

The Federal Funds Rate (aka Fed Funds Rate) is the interest rate at which banks lend money to each other.

Objection: Isn’t a bank supposed to keep all of your money? If so, it’s worrisome to think about a bank needing more money.

We agree. Yet banks lend money to each other—daily.

How Does the Fed Funds Rate Impact You?

The Federal Funds Rate influences bank borrowing costs directly.

So, when Fed Funds rates go up, it costs more for J.P. Morgan Chase to borrow money. And when it costs more for J.P. Morgan to borrow money, it’s going to cost more for you as well. Changes in the Federal Fund Rate will usually lead to changes in the prime rate.

What Is the Prime Rate?

It’s the rate predominately used to set borrowing rates for individuals. The prime rate influences the rates for credit cards, home equity loans, auto loans, mortgages and personal loans.

Who Is the Grand Poobah in Charge of this Rate?

The Federal Open Market Committee (FOMC), affectionately referred to as “The Fed,” controls the Fed Funds Rate. A group of 12 individuals, they hold a lot of power. Benjamin (Ben) Bernanke is the current Chairman of the FOMC.

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