Group 9 – Analysis of the FED’s federal discount rates over the last 10 years

« The prime rate, as reported by The Wall Street Journal’s bank survey, is among the most widely used benchmark in setting home equity lines of credit and credit card rates. It is in turn based on the federal funds rate, which is set by the Federal Reserve.

The federal funds rate is the primary tool that the Federal Open Market Committee uses to influence interest rates and the economy. Changes in the federal funds rate have far-reaching effects by influencing the borrowing cost of banks in the overnight lending market, and subsequently the returns offered on bank deposit products such as certificates of deposit, savings accounts and money market accounts. Changes in the federal funds rate and the discount rate also dictate changes in The Wall Street Journal prime rate, which is of interest to borrowers. The prime rate is the underlying index for most credit cards, home equity loans and lines of credit, auto loans, and personal loans. Many small business loans are also indexed to the Prime rate. The 11th District Cost of Funds is often used as an index for adjustable-rate mortgages. »

« The Federal Reserve likes to keep the fed funds rate between 2-5 percent. It’s the sweet spot that maintains a healthy economy. That’s where the nation’s gross domestic product grows between 2 percent and 3 percent annually. It has a natural unemployment rate between 4.7 percent and 5.8 percent​. Price increases remain below the Fed’s inflation target of 2 percent for the core inflation rate. »

But now let’s have the look on the most historical changes of the FED’s federal discount rates over the 10 past years: the lowest interest rates were during the beginning of the 21st century: the interest rates and discount rates of the Unites States were around 1 percent per year. The highest interest rates were at the period of 2008, the period of the financial crisis: the interest rates and the discount rates were around 6 percent per year.


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