real estate investments : interest rates - "Federal Reserve Rate Changes and Consumer Interest Rates

Interest rate changes are the most widely publicized method the Federal Reserve uses to control the money supply.

You will see all kinds of speculation about what the Federal Reserve will do before such meetings, which affects the stock market. You will also hear media reports about how changes in the interest rates will affect interest rates for consumer items, such as mortgages and credit cards.

Despite this kind of media attention, the interest rate changes do not directly affect consumers. When the Fed announces a change in interest rate, it does not affect your credit card interest rate directly. It refers to the interest rate the Fed charges commercial banks to borrow money from the Federal banks. This is also called the discount rate.

Whenever the Fed changes the discount rate, it does so to either make it more or less profitable for the commercial banks to borrow money from the Fed to make loans.

These are the essential points to keep in mind: 1. The purpose of the Federal Reserve system is to control the amount of money in the system. 2. The purpose of commercial banks is to make money. They make money by loaning money to borrowers.

It is a matter of profit. If the banks must pay more to borrow money whenever the Fed raises the interest rate, the banks make less profit from their loans to customers. If the banks can pay less to borrow money whenever the Fed decreases the interest rate, the banks increase their profit from loans to customers.

When the Fed changes the interest rate it charges banks, this affects the speed of money in the economic system. The lower the interest rate, the faster banks can loan out money and increase the amount of money in the system. The higher the interest rate, the slower banks can loan out money. So, even though the interest rate directly affects banks, these rate changes matter to all of us.

The bottom line fact is that the Fed does not change consumer interest rates. The banks might decide to change interest rates on credit cards and adjustable rate mortgages, but these changes are not directly tied to any changes the Fed makes in the rate it charges banks to borrow money.

By Kalinda Rose Stevenson, Ph.D.

Article Source: http://www.realestateinvestmentarticles.net

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