Definition
The fed funds rate is the primary monetary policy tool of the Federal Reserve. By raising the rate, the Fed slows economic activity and inflation; by lowering it, the Fed stimulates growth. Changes ripple through the entire financial system, affecting mortgage rates, corporate borrowing costs, bond yields, stock valuations, and currency values. The Fed Funds rate is the most important single price in global finance.
lightbulb Example
The Fed raises the fed funds rate from 4.5% to 5.0% to combat inflation. Mortgage rates increase from 6.5% to 7.0%, reducing housing affordability. Corporate borrowing costs rise, slowing investment. Stock valuations compress as discount rates increase.
verified_user Key Points
- Primary Fed monetary policy tool
- Higher rate slows economy and fights inflation
- Lower rate stimulates growth and employment
- Affects all financial asset prices globally