After years without a rate hike, the Federal Reserve is really diving into the hikes now as they increased the federal funds rate by 0.25 percent for the third time in six months. The move wasn’t exactly a surprise for anyone, as the Fed has spoken about how they believe the economy is ready for a rate hike. But now it looks like they’re really buying into that theory, and why that might be needed right now
What’s Happening to the Federal Reserve?
The federal funds rate has seen more action in the last six months than the last few years combined. And that’s a good thing. That means that rather than just saying they believe in the economy, the Federal Reserve is proving it by saying that Americans can handle their interest being more expensive. And while that can be a little annoying for consumers, it’s actually a good thing. The federal funds rate is a short-term interest rate applied to financial institutions which loan funds to other financial institutions (usually overnight). This rate affects monetary and financial institutions, which in turn affects employment, growth, and inflation. Basically, the higher the federal fund rate, the more expensive it is to borrow money. The more a bank pays for its money, the more the bank’s customers have to pay for mortgages, car notes, credit cards, and loans.
This increase pushes the federal funds rate over 1% for the first time since 2008 during the last U.S. recession. And while that may seem high, the rate needs to continue going up. The average rate over the years has been about five percent, so we’ve got a long way to go. That’s important because since World War II, the country has experienced recessions about once every six years. Which means another recession is coming. It’s not a question of if, but when. Interest rates are used to combat recessions by lowering rates to facilitate not only spending, but more favorable conditions for borrowing.
Find out more about Fed’s third rate hike by watching this news clip from CBS News:
That’s why more rate hikes are on the horizon, and why you should be okay with those hikes. The Fed believes economic growth has rebounded, and this latest rate hike is the proof.
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