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Federal Funds Rate

Candlefocus Editor

The federal funds rate is one of the most influential economic indicators in the United States. Generally, when the federal funds rate is raised, borrowing costs go up, affecting the cost of consumer loans and credit cards as well as business investment. Conversely, when the rate is lowered, borrowing costs go down. This has a beneficial effect on the overall economy, as lower borrowing costs encourage businesses to invest in expansion and consumers to purchase more goods and services.

The FOMC sets the target federal funds rate eight times a year based on economic conditions. When the economy is not performing well, the FOMC reduces the rate in the hope that lower borrowing costs will stimulate economic growth. Conversely, when the economy is doing well, the FOMC raises the rate in order to keep inflation in check.

The federal funds rate has a major impact on the stock market. When the rate is lowered, investors typically take advantage of the low borrowing costs, leading to higher stock prices. Conversely, when the rate is raised, investors tend to become more cautious and stock prices tend to fall.

The federal funds rate is a key indicator of the broader economy and, as such, should be monitored closely by any potential investor. By understanding the forces that drive the rate and how those forces affect the stock market, investors can make informed decisions about their investments.

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