Reference no: EM133184484

The federal funds rate is used as a base rate throughout global economies. It refers to the rate at which banks lend to each other. An increase in the federal funds rate is followed by increases in the borrowing rates throughout the economy.

Rate increases make borrowing less attractive as interest payments increase. It affects all types of borrowing including personal loans, mortgages, and interest rates on credit cards. An increase in rates also makes saving more attractive, as savings rates also increase in an environment with a tightening policy.

The Fed may also raise reserve requirements for member banks, in a bid to shrink the money supply or perform open-market operations, by selling assets like U.S. Treasuries, to large investors. This large number of sales lowers the market price of such assets and increases their yields, making it more economical for savers and bondholders