I know what the fed funds rate is. My question is WHY do they all follow it? If I’m selling something and my competitors are at 7%, why wouldn’t a bank do 6% to capture the market?
In: Economics
They do. There is variation in mortgage rates between different banks. But it’s not very big because they all still have to make money. If they loan at a lower interest rate then they get more loan customers…but they don’t make as much money.
The money they loan out has to come from somewhere, or at least a fraction of it. So they need to pay interest to their savings customers to get their money, or borrow it from another bank. No bank will loan at cheaper than the fed rate (otherwise you’d just borrow from the fed), so that sets the lower limit that the bank can borrow money so they need to charge more than that to make money.
If they loan our money that people have deposited, they need to get more in the loan than they’re paying the depositors interest. So if they lower their loan rate then they also have to lower their savings rate to maintain profit, but with lower savings rates less people will deposit there.
It all has to balance, they’re all competing in mostly the same space, and it’s all sitting on the floor of the fed rate.
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