Federal Reserve Basis Points: What they are and how it works

Yahoo Finance Live's Brian Cheung explains what the Federal Reserve’s basis points rate hike means.

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BRIAN CHEUNG: What does 25 basis points-- as the smart people call it, it's 0.25%-- actually do? One primary way that the Fed conducts monetary policy is, of course, by setting short-term interest rates. During times of economic malaise or downturns, right, the Federal Reserve will lower interest rates to spur more borrowing, and lending. Now that might help, but overdoing it can also lead to this, which is inflation.

So in a case like this, what does the Fed do? Well, they turn to the reverse, which is raising interest rates. That's where the name, the Central Bank, comes into focus here. The Fed is the banker's bank. And in the same way that we leave money at your bank or at your credit union, the Fed has large US banks parking money overnight with them. The Fed will pay some amount to keep the money there. And basically up until yesterday's announcement, that rate was about 15 basis points or 0.15%. And that matters because that becomes the benchmark for how banks price their products.