The outlook for interest rates has been a hot topic in financial circles lately. The question on everyone’s mind is when are the feds going to raise interest rates? Unfortunately there is no easy answer to this question. The answer is heavily dependent on a number of factors including the state of the economy and the actions of the Federal Reserve.
In the past the Federal Reserve has typically raised interest rates when the economy is doing well. They do this in order to keep inflation in check. However with the economy still struggling to recover from the Great Recession many experts believe that the Fed will be reluctant to raise rates anytime soon. In fact some believe that the Fed may even wait until 2016 before taking any action on rates.
Of course the timing of a rate increase is always subject to change. If the economy unexpectedly picks up steam the Fed may move sooner than expected. Conversely if the recovery falters the Fed may decide to hold off on any rate hikes. As always the Fed will be closely monitoring economic data and making decisions based on what is best for the economy.
So when will interest rates finally start to rise? Only time will tell. However we can all be sure that the Fed will be very careful in making any decisions that could impact the economy.
What is the federal funds rate?
The federal funds rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight on an uncollateralized basis.
Why do banks lend reserve balances to other banks?
They do it to meet their reserve requirements set by the Federal Reserve.
How does the Federal Reserve set the federal funds rate?
The Federal Reserve sets the federal funds rate through Open Market Operations.
What are Open Market Operations?
Open market operations are the transactions of the Federal Reserve in the securities market.
The Federal Reserve uses open market operations to influence the supply of reserve balances in the banking system and as a consequence the federal funds rate.
Who buys and sells securities in Open Market Operations?
The Federal Reserve Bank of New York trades securities in Open Market Operations on behalf of the Federal Open Market Committee.
What types of securities does the Federal Reserve buy and sell in Open Market Operations?
The Federal Reserve buys and sells Treasury securities federal agency securities and mortgage-backed securities.
What is the Federal Reserve’s primary objective in conducting Open Market Operations?
The primary objective of the Federal Reserve’s Open Market Operations is to influence the federal funds rate and thereby the quantity of reserve balances in the banking system.
What is the relationship between the federal funds rate and the quantity of reserve balances in the banking system?
The federal funds rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight.
The quantity of reserve balances in the banking system influences the federal funds rate.
How does the Federal Reserve influence the federal funds rate?
The Federal Reserve influences the federal funds rate by changing the quantity of reserve balances in the banking system through Open Market Operations.
How does the Federal Reserve influence the quantity of reserve balances in the banking system?
The Federal Reserve influences the quantity of reserve balances in the banking system by buying and selling securities in Open Market Operations.
What are the consequences of the Federal Reserve buying securities in Open Market Operations?
When the Federal Reserve buys securities in Open Market Operations it increases the quantity of reserve balances in the banking system.
This increase in the quantity of reserve balances reduces the federal funds rate.
What are the consequences of the Federal Reserve selling securities in Open Market Operations?
When the Federal Reserve sells securities in Open Market Operations it decreases the quantity of reserve balances in the banking system.
This decrease in the quantity of reserve balances increases the federal funds rate.
How does the federal funds rate influence economic activity?
The federal funds rate influences economic activity by affecting the cost and availability of credit.
How does the federal funds rate influence inflation?
The federal funds rate influences inflation by affecting the cost and availability of credit.
How does the federal funds rate influence employment?
The federal funds rate influences employment by affecting the cost and availability of credit.
