The Federal Funds Rate is the interest rate at which banks can lend or borrow overnight funds from each other and from the Federal Reserve. It is the primary tool that the Federal Reserve uses to implement monetary policy in the United States. When the Federal Reserve wants to stimulate economic growth, it will lower the Federal Funds Rate, making borrowing cheaper and encouraging lending and investment. Conversely, when the Federal Reserve wants to slow down economic growth and curb inflation, it will raise the Federal Funds Rate, making borrowing more expensive and slowing down lending and investment. The Federal Funds Rate has a wide-ranging impact on the economy, as it can affect everything from mortgage rates and credit card interest rates to the stock market and the value of the U.S. dollar. As such, changes to the Federal Funds Rate can have a significant impact on the financial well-being of normal Americans.
Inflation is the general increase in the price of goods and services over time. It is typically measured as the percentage change in the Consumer Price Index (CPI), which is a basket of commonly purchased goods and services, over a specific period of time. Year-over-year measures of inflation compare the CPI from one year to the same period the following year. For example, a year-over-year measure of inflation of 2% means that the prices of the goods and services in the CPI basket have increased by 2% over the past year.
Year-over-year measures of inflation are important because they provide a snapshot of the overall price level in the economy and can indicate whether the economy is experiencing deflation (a decrease in prices) or inflation. Normal Americans are affected by inflation because it can erode the purchasing power of their money. For example, if the year-over-year measure of inflation is 3%, it means that a good or service that cost $100 a year ago will now cost $103. This means that people will have to spend more money to buy the same goods and services, which can strain their budgets. Inflation can also affect the value of investments, such as stocks and bonds, as well as the returns on those investments.