How Does the Fed Control Interest Rates?

Posted on October 27th, 2022

The Fed Funds Rate, which is controlled by the Federal Reserve Board (also known as the Fed), is the interest rate at which banks charge each other to borrow money, which also sets the baseline interest rate at which banks and other financial institutions can charge to consumers, which makes loans and credit card debt more expensive, while make treasury bonds pay more.

This year, the Fed has been aggressively increasing this rate in their attempt to fight inflation. The direct effects of increasing the Fed Funds Rate are more expensive borrowing costs and reduced demand for borrowing money. By increasing the rate, the Fed hopes to slow the economy down and pacify raging inflation that has been the highest since the 1981 double dip recession.

At the start of the year, interest rates were effectively pinned near 0% as it had been for the majority of the last ten years. Since the Fed began their hiking spree in March, the rate has jumped over 3% in just 7 months, the fastest increase since 1982. If the Fed continues on this trajectory — and the evidence seems to support it — we are likely to see interest rates above 4% by the end of the year.