federal government

The Federal Reserve sets the guardrails for the federal funds rate, and through that helps control the money supply for the nation.

When you take out a loan for a car, charge something to your credit card, or get a personal line of credit, there is going to be an interest rate that applies to your loan.

A lot of different factors go into what you will be charged, including your own personal credit score. But even those with flawless credit still see a minimum charge that they can't get around. That all goes back to the Federal Funds Rate.

One thing consumers rarely realize is that all of our banks are lending money to each other every night. Banks are legally required to maintain a certain percentage of their deposits in non-interest-bearing accounts at the Federal Reserve to ensure they have enough money to cover any withdrawals that may unexpectedly come up. However, deposits can fluctuate and it's very common for some banks to exceed the requirement on certain days while some fall short. In cases like this, banks actually lend each other money to ensure they meet the minimum balance. It's a bit hard to imagine these multibillion-dollar financial institutions needing to borrow money to tide them over for a bit, but it happens every single night at the Federal Reserve. It's also a nice deal for those with balances above the reserve balance requirement to earn a bit of money with cash that would normally just be sitting there.

The Federal ReserveThe Federal Reserve


The exact interest rate the banks will charge each other is a matter of negotiation between them, but the Federal Open Market Committee (FOMC) (the arm of the Federal Reserve that sets monetary policy) meets eight times a year to set a target rate. They evaluate a multitude of economic indicators including unemployment, inflation, and consumer confidence to decide the best rate to keep the country in business. The weighted average of all interest rates across these interbank loans is the effective federal funds rate.

This rate has a huge impact on the economy overall as well as your personal finances. The federal funds rate is essentially the cheapest money available to a bank and that feeds into all of the other loans they make. Banks will add a slight upcharge to the rate set by the Fed to determine what is the lowest interest that they will announce for their most creditworthy customers, also known as the prime rate. If you have a variable interest rate loan (very common with credit cards and some student loans), it's likely that the interest rate you pay is a set percentage on top of that prime rate that your lender is paying. That's why in times of low interest rates (it was set at 0% during the Great Recession), a lot of borrowers should go for fixed interest rate loans that won't increase. However, if the federal funds rate was relatively high (it went up to 20% in the early 1980's), a variable interest rate loan may be a better decision as you would be charged less interest should the rate drop without the need to refinance.

The federal funds rate also has a major impact on your investment portfolio. The stock market reacts very strongly to any changes in interest rates from the Federal Reserve, as a lower rate makes it cheaper for companies to borrow and reinvest while a higher rate may restrict capital and slow short-term growth. If you have a significant portion of your investments in equities, a small change in the federal funds rate can have a large impact on your net worth.

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By Lauren Aguirre

Often the health and vitality of the economy is used as a measure of a president's success. If the economy is healthy, the president is doing a good job. If it's not, then there are some things to work on. Many people will blame the state of the economy on the current president. It's always his fault. But is it really? How much impact does the president really have on the national economy?

The truth is: not much. At least not in terms of practical, concrete means. The federal government has some tangible controls on the economy, but these are usually not enough to prevent a huge disaster like the Great Recession in 2008. And many of them are out of the president's direct control anyway. The economy functions on a natural cycle. An entire and flow of growth and recession. A recession is inevitable in a modern economy, but there are a few tools that can be used to control how bad it can get.

The first tool you're probably thinking of is a stimulus package. A stimulus is often an injection of money into a slowing or floundering economy. The goal is to reinvigorate the economy or reverse a recession. The injection of cash is meant to boost employment and spending on the short term to get the economy back on track. A stimulus package is often negotiated in Congress. Once it's passed, the president signs it. The president is often involved in the negotiations, but he has no real control over what the final bill would look like or whether it will pass.

Another less abstract federal tool is controlling the interest rate. The Federal Reserve, which controls American currency, can raise or lower the interest rate through manipulation of federal bonds. Right now, the interest rate is historically low. It has stayed that way since the Great Recession. This is the rate that banks use to borrow money from each other. And in turn, affects the rates on your savings account and on personal loans. The national interest rate also controls the rate of inflation, or how fast the value of a single dollar depreciates. Low rates encourage borrowing money. High rates discourage it. The Federal Reserve is a part of the executive branch, but it is an independent agency — even though the chairman is appointed by the president. It does heed advice from the president, it ultimately makes decisions outside of the day's political contentions.

However, the president may have more control in terms of the country's morale. Often, the president is the leader of our country and is often looked to for solace or encouragement when times are tough. He can offer hope in a trying time. In fact, the main reason presidents announce plans to fix the economy is to appear strong and in control in the face of a crisis. This image can give comfort to people who are struggling. This can be just as, if not more, important than having tangible controls over the economy.

Overall, the perception that the president sits at the knobs of the economy just isn't accurate. The president doesn't really have much concrete control over the current economic climate. He can offer comfort and some solutions to those suffering in a bad economy. There are a few tools the federal government can use to help the economy along, but no president can make a recession disappear overnight.