Top Factors that Influence the Fed Funds Rate

Everyone's waiting for rates to go down.

What exactly are we waiting for?

Here are three factors financial experts are watching to anticipate the Fed's next moves.

Keep in mind that the Fed Funds Rate does not directly impact fixed-rate mortgages. If the Fed raises the Fed Funds Rate, for example, mortgage rates do not directly jump up in the same way. It does impact HELOCs and credit cards.

1.Treasuries sold by the Federal Reserve

As the Fed increased rates, banks were able to earn more by placing money In Reverse Repos instead of buying treasuries. But when the Fed Funds Rate peaked, they put the money back in treasuries. The US sold $2.5T in treasuries in May 2023 but that number quickly dropped to $500B at the beginning of 2024. In other words—the Fed’s piggy bank is running out! 

2. The Unemployment Rate

The Fed members generally expect a lower unemployment rate than the Congressional Budget Office.  Most Fed members see the unemployment rate hitting about 4% this year.  But if the congressional budget office is correct and the rate goes up to 4.5%, the Fed will have to adjust their interest rate plans. If the unemployment rate goes up beyond 4%, the Fed will have to cut rates more aggressively, more quickly, or both.

3. The Inflation Rate

A big part of the Fed’s reasoning for raising rates is to offset rising inflation. The inflation rate decreasing is a good indicator of upcoming interest rate decreases. As year-over-year inflation grows closer to 2%, we’re more likely to see lower interest rates as well. Remember, the Fed prefers to look at PCE inflation, not core consumer inflation.