Question

Which interest rate does the Federal Reserve target for change when it announces a new interest rate policy?

a. the real interest rate

b. federal funds rate

c. the consumer lending rate

d. the nominal interest rate

Answer 1

Correct option - b) federal funds rate

The fed funds rate is the interest rate banks charge each other to lend Federal Reserve funds overnight. But it's also a benchmark for interest rates on credit cards, mortgages, and bank loans, and the main tool the nation's central bank uses to influence the U.S. economy. Arguably, that makes it the most important interest rate in the world.

federal funds rate is used to control the supply of available funds and hence, inflation and other interest rates. Raising the rate makes it more expensive to borrow. That lowers the supply of available money, which increases the short-term interest rates and helps keep inflation in check. Lowering the rate has the opposite effect, bringing short-term interest rates down.