How to Define the Key Interest Rate
- 1). Determine when the rates will change. The Federal Open Market Committee takes a look at economic conditions and meets eight times a year to determine if the Federal Funds Rate should be changed as a result.
- 2). Review changes in the Federal Funds Rate. When the Federal Funds Rate decreases, the prime rate decreases, which leads to a reduction in the rates of loan products, such as credit cards and variable rate mortgages. Lower rates entice more consumers to borrow, which leads to an increase in economic activity. Increasing the Federal Funds Rate slows down economic activity.
- 3). Acquire information about how banks borrow money. Overnight banks will borrow money from each other using the Federal Funds Rate as the borrowing rate. Banks are required to keep money on hand to meet reserve requirements. If one bank does not have enough reserves on hand, it borrows to replenish its resources. A shortage of reserve requirements means a bank has less money to lend to consumers.