The targeted rate is a set-piece for the original rate that international banks charge each other on reserve loans on an overnight basis. Rates on interbanking loans are negotiated by the each bank and usually stay near to the prescribed rate.
The targeted rate can also be referred to as the “nominal rate” or the “federal funds rate”. The federal funds rate is significant because many other rates are connected directly to it or associate closely with it. Bringing a change in the federal funds rate influences the money flow, starting with banks and gradually going down to consumers.
Low financing purchases can encourage investing and borrowing. However, when rates are too less they can create excessive increase and perhaps leading to inflation. Inflation munches away at purchasing strength and could underestimate the sustainability of the prescribed economic expansion. Well, on the other hand, when there is surplus growth the banks raise interest rates. Rate increases are implemented to slow inflation and return progress to more sustainable levels. Rates can never get too high, because excess expensive financing would lead the economy into a span of diminishing growth or even worse, contraction.
The effect of a rate decrease on credit card debt depends on whether the credit card carries a fixed rate or not. For consumers with credit cards of fixed rates, a rate cut generally leads to no change. Scores of credit cards with variable rates are connected to the prime rates, so a cut in federal funds rate will generally lead to a lower charge on interest. It is very significant to keep in mind that even if a credit card holds a fixed rate, credit card companies can cause a change in interest rates whenever they wish to, provided they give advanced notice regarding it.
When the international banks cut down interest rates, consumers usually get less interest on their deposited savings. Banks will generally lower the rates paid on cash held in regular savings accounts and money market accounts. The cut in the rates generally takes a few time to be shown in bank rates.
The Federal Reserve sees it prescribed rate as a monetary policy instrument, and the effect of a sudden change to the targeted rate depends if you are a borrower or not. Reading the terms and conditions of financing and savings documents would help in determining which rates are feasible to the individual so that the next time the banks cut down on interest rates, he or she would know what the decrease means to the wallet.