The fed funds rate plays a significant role in controlling the U.S. economy because it can not only impact short-term interest rates like the credit card interest rates and the savings account rates but also cast an influence on long-term rates such as mortgages and corporate bonds.
Ever since 2008, the fed fund rate has been set at virtually 0 for several years in the hope of rebuilding the economy of the United States. Many people just wonder when the Federal Reserve will raise the rate.
Why does the fed funds rate remain low?
The major purpose of lowering the rate is to maintain economic growth, especially during the recession. For borrowers,the low rate is good news because the interest rates on their loans can also become lower. This means people will borrow and spend more money. On the other hand, a low rate results in lower returns on savings accounts, bonds, and certificates of deposit, thus leading many savers to save less and consume more.
Therefore, by cutting rates, the economy can be stimulated and confidence can be restored. Besides, since the fed funds rate can influence variable-rate mortgages, house prices will rise, leaving a chance for the housing market to recover. That is why the Fed cut the rate from 5%-5.25% down to 0%-0.25% during the financial crisis between 2007 and 2008.
When will the rate be raised?
As long as the economy improves, the employment rate rises and house prices remain stable, the fed funds rate will go higher. Or, if the low interest rate begins to force families and businesses to store more cash instead of spending it, raising the rate is also possible.
Currently, the rate is still set between 0% and 0.25% due to the economic collapse caused by the Covid-19 outbreak. Could the rate be raised again? Probably, if only we can weather the pandemic and get the economy back to the track. Yet, the real problem is, could we survive the pandemic?