Monday, July 31, 2006

The Fed Rate and What It Means to You, In 50 Words or Less

Author: Nick
Category: Money
Topics: ,

the fed stores all its money in here

I like explanations of complicated things kept short. The shorter an explanation is, the fewer words there are to be confused by. In May I talked about why the housing bubble is popping in 50 words, so let’s see if I can give the same mini-explanation for another topic which often confuses people: the Federal Reserve Fund’s interest rate and what it means to you.

By law, banks need reserves. When short, they borrow overnight from the Fed at the rate it sets (or another bank). The prime rate, at which banks offer best customers loans, hovers around Fed rate plus 3%. Fed rate high, loans costlier, economy slows; rate low, loans cheaper, economy grows.

Fifty words exactly again. Delightful!

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