Interest Rates
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.
ECB Stimulus Sends Spanish Bond Prices Soaring
Spanish Bond Prices Rise 4.9% in 3 Months Despite being locked in middle of an epic political battle, Spanish government bonds continue to provide relative safety. Yields on the 10-year note dipped below one percent this month as investors clamored.
Bank of Japan Running Out of Bonds to Buy
Japanese Banks Run Dry of Bonds to Sell The Bank of Japan (BoJ) appears to have hit a ceiling on its monetary policy. In its eagerness to absorb government bonds, the BoJ seems to have exhausted the supply of bonds.
U.S. Dollar Drops to 8-Week Low Against Euro
Low Rate Expectations Keeping Dollar Depressed The U.S. dollar dropped to an eight-week low against the euro today on speculation that the Federal Reserve will continue to keep interest rates low, making the currency less attractive for investors to hold..
Portuguese Bonds Jump on Fears of a Ratings Downgrade
Will Portugal Earn the ECB’s Trust? Portugal’s credit rating came under fire this week as the country struggled to keep its Better Business Bureau (BBB) rating. Holding its creditworthiness above water is a necessary condition for the country to continue.
Bond Traders Ride Big Swings in Treasury Yields
Bond Yields Rise on Rate Hike Fears Just one day after the Federal Reserve released details from its July meeting, bonds began to swing wildly. There was a rabid sell-off, but traders moved back into both 10- and two-year Treasuries.
Looming Fed Rate Hike Weighs Heavily on U.S. Stocks
Fed Governors Suggest Rate Hike Imminent As Brexit-induced panic begins to fade, the Federal Reserve is rekindling the possibility of higher interest rates. Two Fed officials were dispatched to communicate the Fed’s willingness to raise interest rates, and unsurprisingly, their.
Bond Prices Fall After Fed Official Rate Comments
Rate Hike in September Still a Possibility U.S. bond prices declined after Federal Reserve officials cautioned the market that a September interest rate hike is still a possibility. The Federal Reserve may raise interest rates as soon as next month,.
Investors Accepting Smallest Premium Over Treasuries
Low Returns Driving Investors to Corporate Bonds Investors are willing to accept the smallest corporate bond yields when compared to U.S. Treasuries in a race to find returns. A Bloomberg yield analysis shows that corporate bond yield spread over Treasuries.
German Bank to Impose Negative Interest Rates on Retail Customers
Depositors to Pay 0.4% Interest on Savings Over 100,000 Euros Remember when you first heard about the European Central Bank’s (ECB) negative interest rate policy? For quite a while, many have thought that interest rates on savings accounts would still.
Analysts Slashed Ratings on Municipal Bond Funds
Five Municipal Bond Funds Gets “Sell” Rating Income investors are no stranger to municipal bonds. However, a major financial services firm just warned about the risk in closed-end funds (CEFs) of municipal bonds. On Monday, August 15, Stifel Nicolaus analysts.
