"Understanding Interest Rate Fluctuations"

Interest rates are affected by various factors. The Federal Reserve, which is charged with maintaining the stability of the nation's financial system, raises or lowers short-term interest rates in an effort to maintain stability. The Federal Reserve regularly makes decisions in response to economic ups and downs that the country goes through.

Short-term interest rates are raised to keep the economy from building too fast and risking inflation. The Inflation Rate is the rate of increase in the price of goods and services over a given period of time. The most generally used measure of inflation is the Consumer Price Index, which is calculated monthly by the Bureau of Labor Statistics. Raising interest rates slows down the economy because it makes it more expensive for consumers and businesses to borrow money, which means that will spend less.

The Fed will lower short-term rates when the economy is slowing down. Lowering rates makes it less expensive to borrow money, thus consumers and businesses spend more because goods and services are more affordable. The process speeds up the economy and keeps it from sinking into a recession. Recession is when GDP growth is negative for two quarters or more. GDP growth starts slowing down, businesses stop expanding, employment falls, unemployment rises, and housing prices decline.

When the Federal Reserve cuts short-term rates it is cutting the rate that banks charge each other to borrow money. Those cuts are eventually passed on to businesses and consumers. The same thing happens in reverse when the Federal Reserve raises short-term rates.

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Andre Plessis

Andre Plessis
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