Current Event Corner:
The Federal Reserve

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Ahem. Class, you may now take your seats. Welcome back to Macro-Economics!

I know it has probably been a few years since you have taken an economics class — if ever — so allow this month’s Current Event Corner to jog your memory. Recently, it was announced that The Federal Reserve is lowering interest rates… Mkay? What does that even mean? Keep reading to find out what it means for you personally when The Fed adjusts interest rates. 

If you’ve been reading with me for a while, you know that I have a bachelor’s in finance. Unfortunately, that means that I sat through many, many economics classes. Macro, Micro, you name it. Fortunately, I had a great teacher, so despite the somewhat bland subject matter, I actually found most of economics quite interesting. My favorite part? Fiscal and monetary policies. Allow me to explain. (I’ll keep it short and easy to understand — promise.)

The government adjusts the economy during bad times of recession to get us going again or, in good times, to curb inflation. Adjusting the economy just means that they are trying to manipulate the supply and demand curve, thus having an effect on the everyday money habits of Americans. The supply of and demand for — something determines its price. Too much supply and not enough people buying the goods causes prices to drop. Too much demand and not enough supply to fill orders pushes the price up. 

This brings us to the two ways to adjust the economy. Either by fiscal policy (adjusting taxes and government spending) or by monetary policy (adjusting interest rates and the money supply). These actions can, in turn, move the supply and demand curve up and to the right, which stimulates the economy, or down and to the left, tightening the economy. 

The Federal Reserve Board (a.k.a. The Fed) is in charge of the money supply and interest rates within our country. They adjust these levels by adopting monetary policy.

After the Great Recession of 2008, The Federal Reserve Board did not raise short-term interest rates for seven years. That interest rate (called The Federal Funds Rate) was left at essentially zero as our economy was recovering. Low-interest rates mean that money is cheaper to borrow, giving Americans more incentive to borrow money and spend. More borrowing power means more things are being bought, which pushes the supply and demand curve up and to the right. When money is cheaper to borrow, that increases the desire to buy houses and take out business loans, which helps the unemployment level decrease. In other words, when money is cheaper to borrow, people tend to spend more with a positive impact on the economy and employment.

In 2015, The Fed slowly started creeping up interest rates in order to reign in the economy to avoid rapid inflation. They increased rates slowly until July of this year, where we then went from 2.25% down slightly to 2.00% to prolong this period of economic expansion. This is the first rate cut since 2008. This is good news for those wanting to take out loans or manage credit card debt. As pointed out earlier, lower rates makes money cheaper to borrow.

However, when it comes to those of us who have online high-yield savings accounts, this is not so good news. The Federal Funds Rate serves as a benchmark for short-term interest rates. This includes the current rate of your savings accounts. The interest rates on high-yield online savings accounts are expected to drop amid the latest rate decrease. 

Ally Bank, where I house my savings, has already decreased their annual percentage yield (APY) from a rate of 2.20% to 2.10%. A small drop, but every decimal point counts when it comes to earning interest. This drop means I will earn less interest than at the previous rate over the year. Good news is, brick and mortar accounts at your traditional banks that earn on average less than 1% APY should stay relatively the same. 

Okay, okay. I know that was a lot of information all at once. But, I hope that this conversation has sparked your interest to research the economy a little bit more. After all, the economy doesn’t work unless people like you and I engage in it each and every day, so it is important you know how it operates. Knowing how the overall big picture economy affects your personal accounts keeps you an informed citizen, as well as an informed banker and investor.

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DISCLAIMER: Although I do have experience in the personal finance field, I am not a registered financial planner, advisor, or investment agent. I do not claim to be the expert or provide professional financial advice. Honeybee Budgets and any content or resources made available on this site is for informational and entertainment purposes only. I am sharing my personal experience which may not be applicable to others. I am not liable for any losses or damages related to actions or results related to the content in this website. If you need specific financial advice, consult with a licensed professional financial advisor/planner who specializes in your specific need area.