US reduced interest rate to 1%, what is this 1%? is it the interest on nest egg accounts or mortgage if not?
Answers:
This is the rate that the Federal Reserve charges to large bank for large amounts of cash for short possession loans. The banks then get loans to consumers, marked up for their profits (called margin).
Banks are free to mark up their loans base on risk and term, whatever the souk will bear.
The Fed reduced its target for the Federal Funds rate to 1%. This means the Fed will adjust the money supply such that the rate at which the banks lend respectively other for overnight loans is 1%. This has to do with monetary policy. The Fed uses this monetary policy tool to stimulate the reduction in times of recession, which is the purpose of the current move.
How does this affect you? Federal Funds rate affects short term interest rates within the credit markets. This has an affect on hoard account and consumer loans. Typically, when the Fed Funds rate is lower, the interest you earn on your savings description will be lower. Also, when the Fed Funds rate is lower, typically the rate on your consumer loans and credit card rates will be lower. For example if the Fed Funds rate is reduced from 1.5% to 1%. Then, suppose your credit card rates were 17% before the Fed move, it will walk down to 16.5% after the Fed move. [This explanation is true during normal times. I have to point out that we are currently within an abnormal (or crisis) situation. Cost of credit is getting adjusted difficult across the board.]
This will not affect your mortgage rates. Because mortgages rates are related to the yield on long-term bonds. Those rates depend on mixed other factors including expected inflation.
Basically the 1% is the rate at which banks can borrow money from each other. It will own not baring on the everyday consumer. In fact you may even see mortgage rate jump up because of it.
The above answer got it right. It is supposed to stimulate the reduction, but we will see.
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