Mortgage Help   Mortgage Rates Real Estate Credit Foreclosure Tax
	Federal Reserve Federal Reserve Setting Rates Federal Reserve System: FED Fed. Funds Rates Discount Rate Prime Rate FDIC-Federal Deposit Insurance Corporation Federal Funds Float Money Supply Full-Reserve Banking Inflation Monetary Policy Money Supply Open Market Operations and the Federal Reserve Politics v. Independence Federal Reserve Setting Rates While transactions are part of the function of the Federal Reserve, so is the setting of rates.  Sometimes open market operations are used to affect the interest rates in the long-term, but its strength of "buying power" is not usually that great.  Instead, it will use the discount rate and federal funds rate to affect the prime rate. The Federal Reserve requires that all banks have a certain percentage of their deposits in reserve, and banks often use these reserve to lend money to other banks in overnight loans.  Banks set an interest rate on these loans, and this rate is known as the "federal funds rate," because the monies in the reserves are known as federal funds.  While banks charge each other the federal funds rate, the Federal Reserve also charges the discount rate.  On some occasions banks will borrow from the Federal Reserve directly, but they often prefer to borrow from one another, due mostly to the discount rate being higher than the federal funds rate.  The Federal Reserve knows that both the federal funds rate and discount rate impact the prime rate, which is the amount most banks use to determine interest rates to consumers.  The lower the prime rate is, the easier it is to encourage consumers to borrow money.  This interest rate directly stimulates or slows down the economy. Therefore, the Federal Reserve will make adjustments to the federal funds rate knowing that the prime rate remains about 3 percent higher than this rate.  The Fed makes minor adjustments, .25 to .50 percent, in order to fight recessions or inflation.  For instance, between 2001 and 2003 the country was on the brink of a recession.  In order to fight this trend, the Federal Reserve made 13 adjustments to the federal funds rate to take it from 6.25 percent to 1.00 percent.  These adjustments stimulated the economy and prevented the recession from taking place.  Today, adjustments have been taking place to slow the economy a bit, so the federal funds rate has been increasing in minor increments.