Can anyone explain what the Federal Reserve has to do with interest rates?

Question

I know they set them. But how do those rates affect rates say at a local bank.

Answer 1

One of the rates the Federal Reserve sets is the Federal Funds Rate - the interest rate banks charge when they loan money to other banks.

Another rate the Fed sets is the Discount Rate, which is the interest rate the Fed charges when it loans money to banks.

When banks have to pay more interest on the money they borrow, they raise the interest rates they charge other borrowers.

Answer 2

The Federal Reserve sets Interest Rates which then dictates the cost of money at the banking level. The Federal Reserve is absolutely NOT run by the U.S. Government.

Answer 3

55 years ago - the Federal Reserve board ('FED') became the watch dog for the US gov`t in servicing the interest rates ( and the debt ) of the Gov`t ( US Treasury ) that is charging preferred US banks.
( See : The Treasury accord of 1951 )

Since the banks are paying the LEAST interest rates on what they BORROW - everybody else pays a bit higher ( So the banks make a living too.)
So in essence - when the FOMC ( The FED's comittee that deciedes those rates ) change the interest rates - it affects EVERYBODY !

Answer 4

Basically, the Reserve loans money out to the banks at the 'discount rate.' In order to make money borrowing from the Fed, the banks need to loan it back out at a higher interest rate. The difference between the borrowing rate and the lending rate represents most of the bank's profits.

The rest comes from checking fees. :)

Answer 5

While the marketplace determines interest rates, the Federal Reserve exerts strong influences in several ways:

(1) The FOMC (Fed Open Market Committee) manages 'supply and demand' for US Treasury securities by holding or releasing securities in the portfolios that they control; by increasing or decreasing supply, their actions can drive prices down and rates up (by increasing supply ... or the reverse by decreasing supply).

(2) Fed sets the target rate for short term borrowing by banks (the Fed Funds rate)

(3) Fed determines reserve requirements imposed on bank deposits, which allows them to impact the amount of money in circulation ... managing the 'supply and demand' for liquidity which can impact both interest rates and consumer&wholesale prices.

Answer 6

Federal Reserve Bank is run by the USA Goverment! And the local banks has to follow orders!

Answer 7

actual, plenty earnings the marketplace is tied up in 'the credit crunch' of subprime loan defaults, that the government.has to artificially help debtors. it is achieved by using giving banks low-priced money, who then bypass this directly to retail shoppers. even however, the place does the cheap money come from? In immediately's financial device, no-one is going to lend your cash at 0.25%, so this money could be made in the crudest, maximum literal experience of the be conscious. The Fed prints the money. This dilutes the money marketplace, reducing activity-by using raising inflation! remember, lenders have rights too. in case you positioned 0% activity, a million) you would be unjustly depriving them of livelihoods 2) you may enact rules of unholy inflation to accomplish that.