Ask a Fool: What Is the Federal Funds Rate and Why Does It Matter So Much?

When you hear that the Federal Reserve "raised rates" or "cut rates," what actually happened is that the Federal Open Market Committee changed the target range of the federal funds rate.

This is the interest rate that banks charge other banks to borrow money and is the primary tool that the Federal Reserve uses to achieve its two main objectives: maximizing employment and stabilizing prices.

Without getting too deep into the mechanics of bank capitalization, a lower federal funds rate encourages banks to borrow and ends up injecting more money into the economy. Conversely, a hike in the federal funds rate makes it more expensive to borrow and effectively removes money from the economy.

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Source Fool.com