The Federal Reserve, often referred to as “the Fed,” announced it would lower the target range for the federal funds rate (opens in a new tab) in quarter four of 2024. You might be asking, “What does that mean?” Well, we sat down with our Vice President of Financial Planning, Jesse Schwamb, to help explain.
What is the Federal Funds Rate and What Does it Mean That it Changed?
The federal funds rate is the interest rate that U.S. banks pay one another to borrow or loan money overnight. The Federal Reserve has two jobs:
To ensure full employment, meaning everyone wanting a job can get one, and
To ensure that there is price stability so prices for consumers don't get out of control.
They determine what the federal funds rate will be based on trying to fulfill those job duties.
The interest rate range they determine comes from several different contributing economic factors, such as inflation, employment rates, gross domestic product (GDP) growth, fiscal policy and global economic conditions. “The fed funds rate is a tool informed by various data and used by the central bank to manage the economy and balance employment and price risks,” Jesse says.
So, why did it change?
According to the Federal Reserve, economic risks are evolving with inflation becoming more subdued and unemployment edging higher. The price changes had leveled out, and rates were too high, affecting employment. If you make the cost of borrowing cheaper, more people will spend the money which creates more jobs. If the unemployment rate is too high and prices are elevated, people will stop spending money, and the economy will slow down. The change in the rate helps keep a better balance between employment and prices.
What Does this Change Mean for Savers?
When the Fed increases the rate, savings products have higher returns. This rate change, however, was a decrease in the rate. That does not necessarily mean it is time to stop saving, says Jesse. "Since the rate is trending downward and will likely continue to decrease, now is the time to lock in the higher interest rates on things like certificates. If you can set the money aside now, it’s a good idea to do it now to take advantage of the better rate.”
What Does this Change Mean for Borrowers?
Simply put, interest rates will be lower. That means you will pay less money in interest month over month and could be locked into a lower fixed rate than someone who borrowed, say, three months ago.
For longer-term loans, like mortgages, auto loans and fixed rate home equity loans, the interest rates are determined by the yield curve (opens in a new tab). The yield curve is a graph that shows the relationship between interest rates and the length of time until a debt is due or its maturity. It is a tool that reflects market expectations about future Fed interest-rate moves. The yield curve shows that these rates are going to be lower in the future in anticipation of how the rate could change within a longer year term, like five, 10 or 30 years.
When it’s all said and done, the drop in the federal funds rate generally benefits borrowers more than savers because the former can borrow at lower rates. Savers may not earn as much interest in the short term, but they can in the long term.
According to Jesse, the Fed is trying to keep things in balance. When thinking about how the rate works, use Jesse’s analogy of a thermostat in your house, “Like the temperature in your house, sometimes you have to turn up the air conditioning in the summer and down in the winter to hit a comfortable temperature for everyone.”
We know that these changes can be confusing for consumers. But we’re here to help! Be sure to stop by any of our almost 60 branch locations or give us a call if you need assistance understanding any of our products and services and how they are impacted by rate changes. As the trusted financial institution for almost 600,000 members, we are here to help.
