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.
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.
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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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Federal Reserve News Shakes Markets In the latest U.S. Federal Reserve news, Fed Chair Janet Yellen increased interest rates on Wednesday. The new target will go to 0.50%–0.75%, up from 0.25%–0.50%. The Federal Open Market Committee also approved an increase.