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This mandate of the Fed requires it to modify the money supply.
Heres a deeper look at the interplay between APY and the actions of the Federal Reserve.
What Are Federal Reserve Rates?
The federal funds rate is the amount that banks charge one another for overnight loans.
In other words, these loans help keep the American economy liquid and flowing.
Ultimately, raising or lowering the federal funds rate affects the money supply in America.
When rates go up, loans become more expensive, restricting economic growth.
When businesses and individuals have to pay more to borrow money, less economic activity is generated.
Imagine, for example, that youre looking to buy your first home.
This is just one example of how the federal funds rate ripples through the economy.
What Is APY, and Why Does It Matter?
Whereas a stated interest rate is fixed, APY factors in the effect of compounding.
Youll actually end up with $10,407.
In this scenario, your APY is actually 4.07%, not just 4%.
Savers should keep an eye on APY trends because it can help dictate your savings and investment strategy.
As market rates rise, banks have to adjust their own offerings for compete.
Imagine that youve got $10,000 in a savings account paying 4% interest.
How Quickly Do Federal Reserve Rate Changes Affect APY?
Some dont even offer products like mortgage or home loans at all.
While this helped the economy recover rapidly, it torpedoed the earnings of savers.
This gives you the flexibility to survive any rate-change cycle.
As each CD comes due, you reinvest the money back at the long end of the ladder.
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