Federal funds are the interest charged by the federal government on commercial bank loans. The state of the economy or government plans to strengthen the currency might affect the interest rate. Fund rates can change in two ways. If the federal funds interest rate is increased, commercial banks are less likely to receive federal loans. Accordingly, investments would be affected if the liquidity rate in the market falls (Nelson 2018, 2018). The market’s employment prospects are negatively affected by high interest rates, as it means that investment is less likely. This eventually will result in unemployment. The decline in unemployment is directly related to changes in the federal funds rates.
How does the Federal Funds Rate change impact inflation?
Because money and loans can be readily accessed, a drop in the fund rate encourages liquidity. High liquidity rates can raise the inflation rate. This may have an impact on commercial bank lending rates. It is therefore necessary for continuous regulation of interest rate to reflect the greater liquidity. A rise in the federal funds rate, which would result in less liquidity, would also decrease the amount of loans available on the market. The inflation rate will decrease if there is an increase in the federal funds rates. Commercial banks use federal funds rates to manage inflation and employment rates. The economic effects of a country’s GDP in a particular fiscal year are determined by this (Lunsford, 2020). A nation’s development and growth can be boosted by maintaining good economic stability.