This afternoon, the Fed adjourns after a two-day meeting and it is widely expected that they will leave the Fed Funds Rate unchanged at 5.250%.
So, what is the Fed Funds Rate and why does it matter to everyday people?
The Fed Funds Rate matters to you and me because it is used to calculate Prime Rate, a popular consumer interest rate used for credit cards and home equity lines of credit.
And why is it called “Prime Rate”?
That’s because banks are smart.
Banks know that if Prime Rate was called something like “Consumer Loan Interest Rate”, we would all have our guard up. Instead, it’s named “Prime Rate” and that makes us feel warm and fuzzy. “Prime” is a strong word with a positive connotation.
It’s important understand, though, that when the Fed makes changes to the FFR, it directly impacts Prime Rate; the two move in lock-step.
Prime Rate is always 3.000% higher than the Fed Funds Rate.
For example, in June 2004, the FFR was 1.000% and Prime Rate was 4.000%. Since that date, however, the two have increased to today’s levels of 5.250% and 8.250%, respectively.
Because of the increase, credit card balance-carrying Americans have faced a 4.00% APR increase and homeowners with home equity lines of credit have watched their HELOCs more than double in payment.
The Fed is widely expected to leave the Fed Funds Rate unchanged today, but may provide clues about the future path of the benchmark rate. Any hints that the FFR will be lowered should provide a boost to the housing market.
Of course, the opposite is true, too. If the Fed cites economic strength and that FFR may have to be increased, it should have a detrimental effect on housing.