The Fed is increasing rates. What does that mean?
July 29, 2022
On July 27, 2022, the Federal Funds Rate (or “Fed rate”) increased by 0.75 percentage points. You may be wondering what that means and how it might affect you.
We spoke with Webster First’s Vice President of Risk Management, John Thomasian, to find out. He has over 15 years of experience in the finance industry with an expansive list of accomplishments including:
- Chairman of Webster First Federal Credit Union’s Asset and Liability Management Committee
- Graduate of Nichols College with a degree in Finance & Accounting
- Graduate of Eascorp’s Advanced Asset Liability Management (ALM) & Investment Academy
- Graduate of the National Association of Federal Credit Union’s (NAFCU) Management Development Institute
- Member of the NAFCU Political Action Committee
- Chairman of the Town of New Braintree Finance Committee
- Recipient of BusinessWest’s 40 Under Forty 2021 award
With a list of credentials this long, we knew he could help us answer the important questions.
What is the “Fed Rate”?
The Federal Funds Rate is the rate financial institutions charge each other for overnight loans. Credit unions and banks are required to keep a certain percent of their total deposits in cash at the Federal Reserve Bank. This leads to them either borrowing or lending their excess cash to each other overnight, and the Federal Funds Rate determines what they are charged or earn.
Why do credit unions change their rates because of the Fed Rate?
The Federal Funds Target Rate influences a credit union’s interest rates because when it is raised or lowered, deposit and lending offerings follow suit in order to maintain the credit union’s net interest margin. Net interest margin refers to the difference between interest earned (from lending) and interest paid (on deposits) by the credit union. Overall, net interest margin is a measure of profitability for the credit union. Changes made to the Federal Funds Rate will alter the cost of borrowings made to the credit union, which influences the credit union’s loan rates that they can lend to its membership.
Why is the Fed Rate increasing as much as it has?
The Federal Open Market Committee (FOMC) is responsible for the monetary policy of the United States by overseeing the open market operations of the country. The long-term goals of the FOMC are to ensure sustainable economic growth for the United States and guarantee price stability.
The FOMC has been increasing rates in an effort to bring down inflation which is currently at a 40-year high, and has increased by 9% year-over-year. The FOMC has a target inflation rate of 2% and in order to bring inflation back down to that target, the Committee has raised the Federal Funds Rate. By raising rates, borrowing becomes more expensive for consumers who in turn spend less. Demand then begins to drop and, in theory, inflation begins to decrease.
What does the rate increase mean for you?
If you have money in a deposit account that earns interest, a rate increase is good news! Although deposit rates typically increase at a slower pace than lending rates, this means that you will eventually be earning more in return off of the money you have sitting in your savings, checking, money market, and certificate accounts. If you owe on a loan that has an adjustable rate, like a mortgage, it may be in your best interest to refinance into a fixed rate. That will save you from having to pay more in interest as rates continue to go up.
To view the most up-to-date rates for all of our products, please visit our rates page.