If you’ve picked up a newspaper or caught the news recently, you’ve probably encountered a story about mortgage rates and the Federal Reserve banking system. Like many borrowers, you might wonder how the Fed determines interest rates and how – in the event of a rate hike – your personal finances could be affected. Here’s a quick overview:
Banks, credit unions, and other lending institutions borrow money from Fed banks. Since they borrow these funds on a short-term basis, the institutions are charged at a discount rate that is set by the Federal Reserve Board. This discount rate has a direct effect on the “Prime Interest Rate,” the rate banks charge their top-rated commercial customers for short-term loans.
The Fed’s board of directors meets each month to set financial policy, adjust interest rates, and provide an economic forecast for the future. Since June 2006, the Fed has raised interest rates several times, a move designed to stabilize the economy that could translate to tighter cash-flow in your household. If you are juggling a mortgage, a home equity loan, and any amount of credit card debt or personal loans,...
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