The feds sets the prime rate which then works its way down into the corporate markets. Corporations right now are borrowing at 1 or 2% interest rates, but if the fed rate goes to 5% then those corporations will have to roll over their existing debt at 5 or 6%.
BTW, I majored in finance in college and worked at Merrill Lynch. 12 years ago I started my own company and have 200 full-time employees. I think I know a little bit about how the economy works.
No.
The Fed sets the target for the Federal Funds Rate (currently, as a range target, used to be a single rate target), which is an interbank lending rate, but don't actually set that actual rate (but it is usually very close to or within the target range.)
Currently, the actual Fed Funds Rate is 0.25%, the target range is 0-0.25.
The prime rate, a measure of available commercial rates, is set by banks lending decisions. It is pretty invariably higher than the Fed Funds Rate; currently, its 3.25%.
> if the fed rate goes to 5%
...it would be an enormous jump from the lowest its ever been to the highest since before the 2009 crisis.
Just to clarify, the Fed doesn't directly set the prime rate, though it does have influence on it:
>...Although the Federal Reserve has no direct role in setting the prime rate, many banks choose to set their prime rates based partly on the target level of the federal funds rate--the rate that banks charge each other for short-term loans--established by the Federal Open Market Committee.
As an intern, yes? I know enough people working sell-side to know that it doesn't give you an intimate understanding of the economy, and certainly not after an internship.
> Corporations right now are borrowing at 1 or 2% interest rates, but if the fed rate goes to 5% then those corporations will have to roll over their existing debt at 5 or 6%.
Fair enough. I don't think we will be seeing 5% anytime soon, nor do I think that will be necessary for a price level increase largely driven by disruption to real output due to the pandemic.
Do you know which rates are the ones the Fed sets?
These threads always bring out the people who don't understand how the economy works.