Rates Current as of Friday February 10, 2012

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How does the Federal Funds Rate affect individual investors?

The Fed Funds rate is the interest rates that banks loan to one another. It is the rate that banks loan each other to meet Federal Reserve requirements. Some banks will have excess funds to loan out, other banks will need funds to borrow. The Fed Funds Rate is the primary tool that the Federal Open Market Committee uses to influence interest rates and the economy. When the Fed expands reserves, the Fed Funds Rate has a supply facto pushing it down. When the Fed contracts reserves, the supply is restricted and the rate generally heads higher. Changes in the Fed Funds Rate have far-reaching effects by influencing the borrowing cost of banks in the overnight lending market, and therefore the returns offered on bank deposit products such as certificates of deposit, savings accounts, and money market accounts. Changes in the Fed Funds Rate also dictate changes in the Prime Rate, which is of interest to borrowers. The Prime Rate is the rate influencing rates for most credit cards, home equity loans and lines of credit, auto loans, and personal loans. Normally the Prime Rate is approximately 300 basis points higher than the Federal Funds Rate. So, if the Federal Funds rate is 4.5%, the Prime Rate will be 7.5%.

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Banking & CD FAQs

Is my bank permitted to charge me an overdraft fee as well as a fee for each day during the period my checking account is overdrawn?

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How can my account be overdrawn when I just made a deposit?

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Yes. The bank may freeze the account to ensure that no funds are withdrawn before the error is corrected. Or the bank may place a hold on the deposit.

What financial institutions are members of the Federal Reserve?

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