How important is the Federal Reserve to you?

Is the Federal Reserve that important to the average American, how closely should you watch them? I don’t understand how or why every TV commentator, newspaper and internet site spends so much time on the Federal Reserve. First of all what they do affects very few Americans directly, the average person will hardly see the effect of a .25% increase if it ever happens.

Yes, when you purchase a new car, or furniture on credit the interest rate you pay may be slightly higher if they increase Fed Fund rates, but rates are at historical lows and a .25% increase on $1000 is an extra $2.50 a year. If you can’t afford that increase then buying the car is probably a bad idea.

The rate increase, if it every does occur, will NOT affect your credit cards unless you some how have a variable rate card, its doesn’t affect your current car loans or any installment credit you have. It WILL directly affect any home equity lines but a 1/4 of a point increase, which equals .25% hopefully isn’t going to put someone into bankruptcy.

Remember, the current Fed Funds target rate is .25-.5%, its the rate that banks can borrower overnight from the Federal Reserve, as you can see .25-.5% is pretty close to ZERO, so if they raise it a couple of times it will just be a little further away from ZERO and interest rates should not be at zero.

Having the Fed Fund rates so close to zero is bad for the long term health of the economy and bad for your CD’s and saving accounts. Although the Fed does not control mortgage rates or long term rates having an accommodating Federal Reserve is good for mortgage rates. When short term rates are low as they are now it makes it easier for people to refinance debt and save money, in addition, to helping the home purchase market. Interestingly, and I won’t get into the exact particulars, the Federal Reserve continues to purchase mortgage back securities which is keeping a lid on mortgage rates, even as they talk about raising Federal Funds rates .25% by years end. My point is a .25% increase is no big deal so relax and be happy.