Friday, May 16, 2014

The "All Else" Part 2, The Fed Funds Rate (white board lesson)

In Part 1 of my "All Else" series I featured the bond market and interest rates. Today we'll look at interest rates from a different angle, how the Fed controls short-term rates and how it can impact the stock market.

Alan Greenspan, Ben Bernanke and Janet Yellen, are the household names of three Fed Chairs, past and present, who---along with their colleagues---highly influence the market that determines what interest rate you'll pay on your next home mortgage, auto loan or, God forbid, your revolving credit card (I want to put "God forbid" in front of auto loan as well, but, well, just pay the sucker off).

The Fed (as in the members of the Federal Open Market Committee) controls the rate that banks pay to borrow money from one another---it's called the Fed Funds Rate. By controlling that rate, the Fed influences the rates that banks charge borrowers. When the Fed Funds target remains, as it does today, in a range of 0% to .25%, banks can make money charging you 4.2% on a 30-year home mortgage. Oh, and---in this environment---they don't pay you much (virtually nothing in fact) on your deposit accounts.

There's much more to be said about the Fed, which I'll be covering in Part 5 of this series. For today, we'll simply look at the very basics of the impact interest rates have on the stock market. In fact, I'll do it super simply on the white board:


  1. […] The “All Else” Part 2, with a little on the Fed, I covered the very basics of the how interest rates can impact stock […]

  2. […] debt looks yet more attractive, which could result in yet lower U.S. interest rates. Now go back to Part 2 where I talk about how interest rates impact stock […]