The Federal Interest Rate and How it Effects Business
Interest is the cost of borrowing money. You pay it in almost every facet of life and business, from taking out a home mortgage, to credit card use, to equipment loans and lines of credit. The rate that you pay or the percentage is not random and is directly correlated to the Federal Reserve Bank’s (The Fed) interest rate. The Fed’s interest rate has an endless effect on how the economy operates and how business is done throughout the world. This effect not only has a direct impact on the stock and bond markets but has an even greater effect on how business operations make decisions and progress in our society. Monetary policy in the United States has been and always will be one
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The Federal Reserve was created in 1913 in response to the financial crisis of 1907, with the signing of the Federal Reserve Act by Congress. It was created to ensure stability among the banking system that was lending money but over leveraging their deposits on hand. This created a realistic fear of bank failures, should there ever be the need to distribute back a high percentage of those deposits in withdrawals or losses. There had been a consistent failure of banks in the past due to this exact situation. This new “Reserve” would lead to the elimination of the Gold Standard, by which banks valued currency based upon reserves of gold in each of their vaults. The problem was that the ratio at which they were lending money was too high and caused these failures to occur. The Fed was created to provide a system by which these banks could borrow money to cover the difference in their portfolios and their deposits on hand. With the new regulations since that last recession in 2008, these portfolios must carry an ever larger deposit percentage in reserve so that the bank will not fail when losses occur. The Fed lends money to these banks at a rate much lower than you or I may obtain a rate and transfers that cost onto the customer with a percentage added for their profit.
The Fed has what is called the “Discount Rate” which is what it uses to lend money to the Lending banks