Why Does It Go Up and Down
It’s smart to know how financial institutions arrive at the interest rates they advertise.
Interest rates are affected by a number of 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 that stability. The Fed regularly takes these actions in response to economic ups and downs that the country goes through on a fairly routine basis.
Short-term rates are raised in what are called expansions — good times — to keep the economy from building too fast and risking inflation. The Fed will lower short-term rates when the economy is contracting — slowing down. Lowering rates makes it less expensive to borrow money. That speeds up the economy and keeps it from sinking into a recession. When the Fed 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 Fed raises short-term rates.
Other factors affect interest rates, too, but on a more irregular basis. A crisis involving the foreign oil-producing nations, for example, could have a major economic impact that could affect interest rates. Long-term interest rates aren’t affected as quickly by economic conditions as are short-term rates
What works for you as a saver works against you as a borrower. When rates are high, you’re earning a hefty amount of interest for your deposits, but you’re going to pay a high interest rate if you need to borrow.
