On September 21, 2022, the Federal Reserve Open Market Committee raised the target for the Federal Funds Rate to between 3% and 3.25%. The Federal Reserve stated that, “inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. The Committee is highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the long run. In support of these goals, the Committee decided to raise the target range for the Federal Funds Rate to 3% to 3.25%.”
The Federal Reserve lowers the Federal Funds Rate when it attempts to stimulate economic growth, as lower financing costs can encourage borrowing and investing. However, if excessive growth and inflation exists, purchasing power is reduced and economic expansion may not be sustainable. When this occurs, the Federal Reserve can raise interest rates in order to attempt to slow inflation and return growth to more sustainable levels.
The Federal Funds Rate is important to the overall U.S. economy as it is the rate at which commercial banks borrow and lend their reserves to one another. It can influence short-term interest rates on consumer loans and credit cards and is watched by investors for its impact on the stock market. Commercial banks generally key their “Prime Lending Interest Rate” 3% above the Federal Funds Rate. As a result of this recent action by the Federal Reserve, most commercial banks will increase their “Prime Rate” to 6.25%, an important factor for those who have variable rate debt tied to the Prime Rate.