The federal funds rate is the Federal Reserve's benchmark interest rate, and it is the rate that banks charge each other for overnight or short-term loans. The rate affects the Wall Street Journal's prime rate, which is the index that companies use to set interest rates for credit cards and vehicle loans, according to Bankrate.Continue Reading
The Federal Reserve adjusts the funds rate to control inflation. Lowering the rate makes it easier for consumers to borrow money, which can bolster a struggling economy. When inflation looms, the Federal Reserve can raise rates, making loans more expensive and keeping a lid on inflation, Bankrate explains.
When the Federal Reserve raises the funds rate, banks have to pay each other more interest. Banks usually pass on their increased costs by charging more for short-term loans and bank-related services, such as checking accounts. Savers reap the benefits of a rate increase because banks offer higher returns on certificates of deposit and money-market accounts, CNBC explains.
An increase in the federal funds rate can affect mortgage rates if the increase sparks a rise in the 10-year Treasury rate that mortgages and bonds follow, notes CNBC. However, this doesn't always happen, and mortgage rates sometimes remain stable even after a federal funds hike.Learn more about Investing