Article1 min read
What the Fed Does With Interest Rates
How the Federal Reserve's policy rate reaches your mortgage, your savings account, and the stock market.
- By
- Lynktor Editorial Team
- Reviewed by
- Lynktor Research Desk
- Updated
The Fed's two goals
The U.S. Federal Reserve has a dual mandate from Congress: maximum employment and stable prices. It defines stable prices as inflation of 2% a year over time.
The tool: the federal funds rate
The Fed sets a target range for the federal funds rate, the rate banks charge each other for overnight loans. Changes ripple outward to other borrowing costs.
- Raising rates makes borrowing more expensive. Spending and hiring cool, which helps bring inflation down.
- Cutting rates makes borrowing cheaper and supports growth when the economy weakens.
The Fed does not set your mortgage rate, but it pushes the whole curve.
How it reaches you
- Savings accounts: yields on high-yield savings tend to rise and fall with the policy rate.
- Credit cards: most card rates are variable and follow the prime rate, which tracks the fed funds rate.
- Mortgages: 30-year fixed rates follow longer-term Treasury yields, which react to expected Fed policy, not just today's rate.
- Stocks and bonds: higher rates lower the present value of future cash flows, which can weigh on prices.
Why changes take time
Rate changes affect the economy with a lag, often estimated at many months. That is why the Fed watches forecasts and data closely, and why it moves in steps.
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