Federal Interest Rate

By: EconomyWatch   Date: 14 October 2010

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Federal interest rate refers to the rate charged by banks and thrift institutions for loans to other financial institutions. Simply put, it is the interest rate at which banks transact with each other.

How Does the Federal Interest Rate Work

In the US, each bank has to maintain a small portion of its deposits with the Federal Reserve Bank (the Fed). This deposit is not supposed to fall below a specified limit. If so, the bank loses its credibility and transacting power. Also, banks do not earn interest on their deposits with the Fed. So, they tend to maintain just the required limit by lending or borrowing money.

As a bank lends money to its customers, the bank depository levels fall. At times, the deposits can fall below the threshold level. The banking institution then requests another financial institution that has surplus deposits to lend money. The twobanking institutions determine the interest rate for this transaction. This is called the federal interest rate. It affects interest rates on other financial instruments, such as loans, investments and credit card debts. It also impacts inflation in theeconomy.

How to Get Information about the Federal Interest Rate

One can get information about the federal interest rate from the US Federal Reserve Bank website. Follow these steps to get the desired information:

  • Select the financial instrument for which you wish to see the rates, such as certificates of deposit, mortgages or credit cards.

  • Select the frequency of updates and view changes in fed rates per day, week, month or year. The frequency of update is determined by the nature of the financial instrument for which you wish to see the rates. For instance, for credit cards, you can consider daily updates, while for mortgage loans, the updates could be annual.

  • Once you select the required fields, you will be directed to a new webpage. This is where you will find appropriate information on fed interest rate updates.

Regular monitoring of updates in the federal interest rate helps banks to estimate changes in the adjustable rate mortgage (ARM) or interest on credit cards.


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