You might notice whenever you borrow money for an auto, home, or personal loan, the interest rates on each change over time.
Sometimes, that’s a good thing, as a lower interest rate is more beneficial to the consumer. WIth a low interest rate, you end up with a lesser payment when time comes to repay your debt.
But, how are these rates determined?
Interest rates are determined by the Federal Reserve, the central bank of the United States. The Fed, as it’s often referred to, meet regularly to discuss interest rates, and whether to raise or lower them to help stabilize the economy.
The economy greatly benefits from employing lower interest rates, as it encourages consumer spending and leads to more job creation. The more jobs are filled, more people are contributing to the economy.
On the other hand, when interest rates go up, it indicates an effort to combat inflation. When costs for loans go up, people are less likely to borrow money. This in turn affects sellers as consumers are less likely to spend money on goods and services. So, purveyors of these goods and services have to lower prices to entice consumer spending. The drop in price brings inflation back down to better levels.
Any harsh movement up or down can be catastrophic for the economy, and could plunge it into a recession. So, the central bank needs to do their best to ensure the nation’s economic future is safe. Keep tabs on interest rates as they might inform you of what to do with your money when you have it and when you need it.