The Federal Reserve Board

Although the Federal Reserve Board may change the interest rate several times a year, changes tend to be modest, in the range of 25 basis points (one-fourth of one percent) at a time, to avoid introducing chaos into the marketplace.

Ultimately, the economists at the Fed take many different factors into account when deciding to raise or lower interest rates. Factors may include stock indices, foreign exchange rates and the relative strength of the dollar.

The Federal Reserve’s Federal Open Market Committee (FOMC) is actually the body that decides monetary policy. The Fed doesn’t actually decide the precise rates banks will charge, but instead, the Fed sets a Federal Funds Rate, which is the interest rate on overnight loans between the Federal Reserve and other banks. Mortgage rates and all interest rates are derived from that rate.

For example, the Fed reduced interest rate thirteen times between January 2001 and June 2003 to stimulate a struggling economy, moving the federal funds rate from 6.5 percent, to a record low of one percent, the lowest in 46 years.

Since hitting the low of one percent, the federal funds rate has slowly crept back up, but is still at historic lows. The federal funds rate has been as high as eight percent, in July of 1990; many of those unfortunate enough to have acquired a mortgage during that month have been able to reduce their mortgage payments through refinancing.

The FOMC’s charter is to regulate the nation’s economy by making changes to the interest rate, for the purpose of stimulating the economy, promoting maximum employment, stable prices and economic growth, and to prevent excessive inflation and deflation.