Research Weekly - The "Fed Rate" and How it Impacts Utah
This week, the Federal Open Market Committee will meet, as they do every eight weeks, and will discuss whether they will increase interest rates. The US Federal Reserve (the “fed”) influences the federal funds rate, which is the interest rate banks and credit unions charge each other to borrow money when they run short on available funds. The lending bank charges interest to the receiving bank and the bank passes the cost on to the customer in the form of increasing all interest rates. The average of these interest rates is referred to as the overnight rate, or the federal funds rate.
The fed does not actually have direct control over the federal funds rate, but instead uses open market operations to modify the supply of money in the economy. This incentivizes banks to modify the rate they charge on loans.
How will a rate increase impact Utah? The Fed will not increase interest rates unless they feel the economy is strong enough to handle a rate increase without stalling spending and investment. They look at a number of metrics to make that determination, such as job growth, unemployment rate, GDP growth, etc. Because they do not feel the country is doing well enough in some of those areas, it is unlikely they will increase rates. Utah, on the other hand, is doing well in each of those categories. Utah would likely be strong enough to withstand any decision made by the fed. In fact, Utah’s residential real estate market has seen very steep value increases over the past few years. This is the same scenario that occurred in 2008 which was referred to as the housing bubble. Because raising interest rates would slow this growth, it is possible a rate increase would not be so bad for the state after all.
Utah has a strong economy and exhibits continued growth. Rate increase or not, Utah has the economic and business infrastructure to withstand the uncertainty facing the market today. Because of Utah’s excellent performance and trajectory, it is primed for continued economic development.