The Federal Reserve Board (FRB) of the United States voted this month to raise the target range for the federal funds rate to 0.25% effective March 17, 2022, and states that it anticipates ongoing increases in the target range will be appropriate. Read the press release issued by the Federal Open Market Committee on the policy change.
Monetary policy changes, like many decisions, are data driven. In this case, one of the factors that influenced the policy change is what the FRB identified as upward pressure on inflation. The FRB considers a rate of inflation of 2% per year as the right amount of inflation and monitors that rate based on the price index for personal consumption expenditures that is published by the Bureau of Economic Analysis as part of its monthly Personal Income and Outlays report.
The Federal Funds Effective Rate (the rate charged for an overnight loan of federal funds) is one of the tools that the FRB uses to stabilize prices. You can track changes over time in this rate using data from the FRB’s H-15 release “Interest Rates.” The chart below trend this data and shows how the prime rate (the rate banks use to price business loans) trends similarly.
What do you think the rate changes could mean for businesses, financial institutions, and the average consumer?