Hello, friends. We are in a new higher interest rate environment and are heading even higher going into 2019 and 2020. I’ll explain what’s happening behind the scenes and what you can expect to unfold in the next year or two.

September Federal Reserve Rate Hike

The Federal Reserve interest rate hike of .25% at the last Federal Reserve Open Market Committee, meeting that concluded on September 26th, 2018, was a continuance of their increasing rate policy that began in December of 2015.

U.S. Federal Reserve Board

The rate increase was applied to the Fed Funds, which is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight, on an uncollateralized basis (unsecured by physical assets like your credit cards).

Reserve balances are amounts held at the Federal Reserve to maintain depository institutions’ reserve requirements. Institutions with surplus balances in their accounts lend those balances to institutions in need of larger balances.

Impact of the Great Recession

The current Fed Funds rate of interest is 2.25% which is up from .25% back in December of 2015. The last time the Fed Funds was at 2.25% was in mid-2008 which means the Fed kept the Fed Funds rate at that historically low level of.25% for around 7.5 years starting at the time of the Great Recession. The Fed very quickly cut the Fed Funds rate from 5% in August 2007 to .25% in December 2008 as part of its Quantitative Easing process at the beginning of the Great Recession.

  • The only consumer interest rate that the Fed Funds directly affects is the Prime rate, which is always 3% + the Fed Funds rate.
  • All mortgage rates and indices follow the Fed Funds rate increases and declines over time.
  • Adjustable rate indices such as LIBO