Interest rates are a fee that lenders charge borrowers for lending money. For example, homeowners are charged an interest rate on the mortgage they take from a bank.
Interest rates fluctuate based on a number of key factors, of which two of the most important are inflation and the Board of Governors of the Federal Reserve. The Federal Reserve determines the interest rate charged between financial institutions via the federal funds rate, which is the key interest rate charged by commercial banks to other banks borrowing money, typically overnight.
By controlling interest rates, the Federal Reserve can control inflation in times of economic growth. The Federal Reserve can also modify interest rates to inject stimulus during an economic slowdown, as it did during three rounds of quantitative easing starting in late 2008.
By increasing interest rates during a period of economic growth, the Federal Reserve discourages borrowing. When interest rates are high, businesses and individuals generally take more time to consider the high cost to borrow before borrowing and spending.
By contrast, when the economy is underperforming, lowering the interest rate makes it cheaper for businesses and consumers to borrow. As a result, in theory, they spend more and stimulate economic growth.
By changing interest rates, central banks essentially change the demand for money. When the Federal Reserve pegs interest rates lower, the monetary policy is expanding—meaning money is cheaper. When interest rates are raised, it makes money more expensive and slows the rate at which the prices for goods and services increase.
Flat Yield Curve Signals Trouble Traders call this number the most important indicator in the world. The San Francisco branch of the Federal Reserve claims that this metric has accurately forecast all nine U.S. recessions since 1955. That’s right, all.
Can You Really Trust Your Bank? Interest rates have started ticking up, but savers like you probably won’t benefit. On June 13, the Federal Reserve raised the range of its key interest rate by a quarter percentage point, to between.
Consider This High-Yield Stock If you own a portfolio of high-yield stocks, there’s one thing you should definitely pay attention to—rising interest rates. Due to the last financial crisis and the ensuing economic recession, the U.S. Federal Reserve kept the.
Take a Pass on Elon Musk’s Tesla Bonds If you need proof that bond investors have lost their minds, take a look at the latest bond offering from Elon Musk and Tesla Inc (NASDAQ:TSLA). On Monday, Chief Executive Elon Musk.
Janet Yellen Delivers Relief for Seniors Despite what you’ve been told, the orange-haired man in the White House is not the most powerful person on Earth. That title goes to the 5’2″ 70-year-old lady who heads the Federal Reserve: Janet.
The 6% Income Stream You Likely Haven’t Considered Today, I want to highlight my favorite way to spot new investment ideas: following headlines. Investors tend to overreact to negative events. Traders will dump shares of everything in an unpopular industry,.
The Last Time This Happened, High-Yield Bonds Crashed 20% Today’s chart highlights a brewing problem in the fixed-income market…high yield bonds. High yield bonds get issued by shaky businesses with less-than-stellar prospects. For this reason, traders nickname them “junk.” Because.
Best Bond Funds for Rising Interest Rates With interest rates gradually increasing, how are bond funds going to react? The focus of this article will be on the potential best bond funds for rising interest rates. For income investors, the.
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How Safe is Your Portfolio From Rising Interest Rates? One of the most common questions that family and friends ask me concerns higher interest rates: “Janet Yellen could tighten policy. That will pull a lot of hot money out of.