The credit markets can be mind-numbing in their complexity, but they are vital to what happens in our everyday lives. They're also the reason President Bush proposed the controversial $700 billion rescue plan. Here are some answers to questions about the credit markets.
Q: What's the credit market?
A: It's several interconnected markets. Some of these markets involve banks lending to each other at overnight rates, and others involve debt options such as bonds.
Q: How does the Fed's overnight rate affect the credit market?
A: The Federal Reserve establishes a target for the rate that banks charge in overnight lending called the Fed funds rate. The overnight lending rate is set by the banks, which are hoarding cash - and are only willing to part with it for a much higher price. The result: They borrow less, and thus lend less.
Q: How does this translate to problems in my life?
A: Commercial banks take a cue from the Fed funds rate when they set the prime rate, which is the interest they charge on loans to customers with the best credit. Changes in the Fed funds rate affect short-term interest rates, foreign exchange rates and the price of goods. McClatchy-Tribune
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