How the Federal Reserve Affects Interest Rates

Learn how to prepare for economic uncertainty with tips from KEMBA Financial Credit Union Central OH

Posted on January 24, 2023

With the recent volatility in mortgage rates and other interest-bearing products, many people are finding themselves very confused. After all, how can the average interest rate on a mortgage increase by more than four percentage points in a year?  The simple answer is the Federal Reserve and their control of the Prime Rate. What is the Federal Reserve, you might ask? We’ve put together everything you need to know below.

What is the Federal Reserve?

The Federal Reserve, also known as the Fed, is the central bank of the United States, whose main responsibility is to ensure the stability of our nation’s banking and financial systems. One of the many ways the Federal Reserve ensures the stability of our financial systems is adjusting the Prime Rate.

What is the Federal Funds Rate?

The federal funds rate is the interest rate at which banks borrow money from each other. Some may be surprised, but banks borrow/lend money amongst themselves. Each bank is required to have a certain amount of money (reserves) at the end of each day and if they fall short of their reserve requirement, they must borrow money from another bank (one that has more than it’s required reserves).  

How Does the Prime Rate Rate Affect Interest Rates?

The Prime Rate is essentially the lowest rate at which a bank is willing to lend money. This means that every time the federal funds rate increases, the amount of interest that your bank or credit union pays to borrow money increases. Those increases are the reason that many loan products have seen increased rates in 2022.

KEMBA Financial has Low Interest Rates

Because KEMBA is a member owned credit union, our rates are typically lower than banks, which help our members save money on the interest they pay. Our rates are impacted by the Fed decisions, but as a non-profit, we take the profits from our banking products and put those funds back into the credit union, lowering the cost of our banking products. If you are looking for a different way to bank, and want to get the best rates, contact our local, dedicated associates at 614.235.2395 and select Option 2 to start the process.


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