Federal Reserve: Created on Dec. 23, 1913 when President Woodrow Wilson signed the Federal Reserve Act into law. The Federal Reserve Act provided for the establishment of up to 12 Federal Reserve Banks to coordinate monetary policy with a seven-member Federal Reserve Board in Washington. The current Chairman of the Federal Reserve Board is Alan Greenspan. He has been chairman since August 1, 1987. Greenspan is also the chairman of the Federal Open Market Committee or FOMC that decides when to change interest rates.
Rate cut: An action taken by the Federal Reserve to spur economic growth. Accomplished by lowering the rate banks pay on overnight loans from other banks and directly from the Federal Reserve.
Rate hike: The Federal Reserve hikes rates to slow down the economy and prevent inflation. Accomplished by increasing the rate banks pay on overnight loans from other banks and directly from the Federal Reserve.
Federal funds rate: The interest charged by banks with excess reserves to other banks needing overnight loans in order to meet their reserve requirements. The federal funds rate is actually set by the market and fluctuates daily but is strongly influenced by the Federal Reserve’s policy of selling US Treasury securities to banks. The federal funds rate is currently 1%.
Discount rate: The interest charged when banks borrow overnight loans directly from the Federal Reserve. This rate is under the control of the Fed and does not fluctuate with the market. The discount rate provides a base for interest rates and is usually the lowest rate. The discount rate is currently 2%
Prime rate: The interest rate a bank charges their best customers. Consumer loans such as home equity, automobile, and credit card rates are often tied to the prime rate. The Federal Reserve indirectly moves the prime rate by changing the federal funds rate, the discount rate or both. The prime rate is currently 4%.
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