Interest Rates Likely to Rise After December FOMC Meeting

It is widely believed that the Federal Reserve will raise the rate it charges banks for overnight deposit lending, commonly called the federal funds rate at the December 15-16 meeting of the Federal Open Market Committee.

The Federal Reserve controls the three tools of monetary policy–open market operations, the discount rate, and reserve requirements. The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, and the Federal Open Market Committee is responsible for open market operations. Using the three tools, the Federal Reserve influences the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks and in this way alters the federal funds rate.

Changes in the federal funds rate trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment, output, and prices of goods and services.[1]

As shown in the graph below, the federal funds rate has been below .25% since 2009, primarily as a result of the 2008 financial crisis and the lingering effects on employment and the economy.

 

More information on the Federal Reserve can be found at their website, http://www.federalreserve.gov/default.htm


[1] http://www.federalreserve.gov/monetarypolicy/fomc.htm