The fed funds rate is the interest rate banks pay for overnight borrowing in the federal funds market. The Federal Reserve uses it to influence other interest rates, such as credit cards, mortgages, and bank loans. It also affects the value of the U.S. dollar and other household and business assets. That makes it the most important interest rate in the world.

Rates Affected by the Fed Funds Rate

One of the most significant rates influenced by the fed funds rate is the prime rate. That's the prevailing rate banks charge their best customers. The prime rate affects many consumer interest rates, including rates on deposits, bank loans, credit cards, and adjustable-rate mortgages.?

There's a ripple effect on the London Interbank Offered Rate (Libor), too.? Libor is used worldwide by banks to determine interest rates charged on adjustable-rate mortgages. Libor will be phased out sometime after 2021.

The fed funds rate indirectly influences even longer-term interest rates. Investors want a higher rate for a longer-term Treasury note. The yields on Treasury notes drive long-term conventional mortgage interest rates

Bond Market:

Higher interest rates directly impact the bond market, as yields on everything from U.S. Treasuries to corporate bonds tend to rise, making them more attractive to new investors. Bond prices move inversely to interest rates, so as interest rates rise, the price of bonds falls. Likewise, an decrease in interest rates sends the price of bonds higher, positively impacting fixed-income investors. As rates rise, people are also less likely to borrow or re-finance existing debts, since it is more expensive to do so.

Mortgage:

A hike in the Fed's rate immediately fueled a jump in the prime rate (referred to by the Fed as the Bank Prime Loan Rate). The prime rate represents the credit rate that banks extend to their most credit-worthy customers. This rate is the one on which other forms of consumer credit are based, as a higher prime rate means that banks will increase fixed, and variable-rate borrowing costs when assessing risk on less credit-worthy companies and consumers.

Forex:

As the fed funds rate increases, overall rates in the economy rise. If global capital flows are moving into dollar-denominated assets, chasing higher rates of return, the dollar strengthens.