Get Interested

This article was written to help understand what the changing interest rates mean. The Federal Reserve Board has the power to change interest rates and uses this power to affect consumer spending.  When interest rates are low, borrowers are more likely to take out a loan to make big purchases.  Borrowers get to keep more money, which leads to more money spent in the economy.  From a consumer standpoint, the downside of low interest is for the banks and lenders.  When the interest rates are low, banks make less money off of each loan.  When interest rates are high, the opposite occurs.  Borrowers don’t have as much disposable income and are required to pay banks or lenders more interest on each loan.  This also causes many consumers to spend less money in their local economies due to the fact that they have less disposable income.  Higher interest rates can have a negative effect on the economy but are sometimes used by the Fed with a purpose.

What is the federal funds rate?  This is simply the rate at which banks lend to each other.  The federal funds rate essentially determines all other interest rates because when this rate goes up or down, it affects the rate at which loans are given to borrowers.  Trying to figure out what is happening with interest rates?  Look at the federal funds rate.  The federal funds rate is also used by the Fed to manage inflation and recessions.  The Fed can manipulate rising prices to control inflation and recessions by keeping an eye on inflation indicators.  When the indicators increase, the Fed increases the federal funds rate to decrease disposable income.  This forces consumers to spend less and in turn the price for services and goods drop with the demand.

So why care about interest rates?  Interest rates will impact everyone in different ways.  As a borrower, following interest rates is important because it will cause significant changes to loans or variable-rate mortgages.  However, a rise in rates can also cause the price of houses to go down.  Sellers will often alter their asking price to account for a change in interest rates.  If someone carries credit card debt, a rise in interest rates will cost more money.  The type of person that saves money or wants a bigger return on a CD, a rise in interest rates will put more money in his or her pocket.  In conclusion, whether a person is a saver or a spender, paying attention to interest rates is important because these changes affect everyone.

 

References

“Effect of lower interest rates”  (Accessed 07/25/16)

 “How Interest Rates Affect The U.S. Markets”  (Accessed 07/25/16)

Murphy, R. P. (2008, June 01). Can the Feds Save the Housing Market?Freeman, (5), 8

 

Photo: 401kcalculator.org

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