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How The Economy Affects The Interest Rate
| Our economy is interlinked with the interest rates. When there are some changes in the interest rates, the economy affects directly. It is an interconnected system. It so happens when Fed changes the bank interest rates, all these changes lead to the changes in economy.
For instance, if the Fed increases the federal funds rate, then banks can borrow money more. In turn, they can increase the interest rates to charge from individual borrowers so as to earn maximum profits. If an individual intends to buy a motor cycle, they may decide to avail loan and spend, but the more they are discouraged to spend, the higher will be the interest rates. And if in any case, the Fed lowers the borrowing money of the banks less by lowering the Federal Funds rate, banks in return maintain their existing profits and to encourage the customers to avail lower interest rates they charge from individual borrowers. Now it is evident that the more the economy flourishes, the more consumers will spend. When the Fed lowers the interest rates, stock market goes up and vice versa. It is a good sign for the progressive economy. It suggests that people will buy more and more goods and services and companies will create more jobs opportunities and will expand the production. Therefore, lower rates are good for the share market, because they lure people to invest in this business and make other investment comparatively less attractive. Like most of the developed countries, if the funds rates lower down, then the investment in fixed-rate securities and other bonds will be quite riskier than the investment in the stock market. It is the influx of money that makes a stock market a healthy place to invest in. In turn, stock market will raise its prices which are an indicator of a booming economy. On the other hand, the value of dollar on the foreign exchange market gets its value lowered. And, for the economy as a whole, the going down of the dollar for a long-term is a bad news for the economy. When the value of dollar goes down, it becomes all the more expensive to deal with the foreign companies which encourage companies to rely on the domestic products, thus injecting more cash into the economy. These loan rates at times fluctuate several years, and sometimes within a year. Economy plays a big role in the interest rates that we pay and the Federal Reserve is one of those components that influence the decision of adjusting interest rates. It is the Federal Open Market Committee that regularly discusses the discount rate and decides whether to raise the interest rate or to lower it which can affect the shorter term loans like fixed rate loans and adjustable loans interest. To wrap up, lower interest rates provide an additional boost to the economy. It is because lower interest rates make it easier to borrow loans, they increase the demand. Lower interest rates increase the consumer capacity to spend more on goods and services which is a good indicator for a healthy economy. |
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