Interest rates are tools used by the Federal Reserve in order to keep an economy on track. When an economy is doing well, interest rates can be kept at a high rate. When an economy begins to slow down, interest rates are dropped. Lower interest rates stimulate business and job growth. However, when interest rates are raised in a slow growth economy, this can lead to stifled growth.
The Federal Reserve is given the job of keeping the finances of the nation stable. In order to maintain stability, the Federal Reserve is able to either raise or lower interest rates, depending upon what the country needs. When the economy is growing, interest rates are raised in order to slow down inflation. Inflation is a problem where products and services that are sought after are outweighed by demand. In other words, when too many people want something in short supply, the prices on those items begins to rise—causing inflation.
If interest rates are raised, the amount of money owed to the credit card companies will rise. Many credit cards have variable rates, depending upon the interest rate dictated by the Federal Reserve. If interest rates go up, credit card companies will raise their variable rates, as well.
When interest rates are low, it’s cheaper to borrow money. Since it doesn’t cost as much to borrow money, more money is available to buy goods and hire people. For this reason, low interest rates are designed to make a slowing economy grow. If the economy doesn’t grow, a country can find itself in a recession. Raising interest rates will hurt an economy that is not growing rapidly enough.
The impact of higher interest rates on the stock market is obvious. When traders and brokers have less money that they can borrow due to higher interest rates, there will be less volume seen on Wall Street. When interest rates go higher, investors will sometimes take the money out of stocks and put it into bonds in order to have a safer haven for their investment.
When interest rates are increased, it costs more to borrow money. That means that businesses will not borrow as much in times of higher rates. When that happens, businesses spend less and hire less. In turn, this slows down an economy and if the economy is already slow, it can cause a recession. Raising interest rates puts the brakes on economic growth.
- Bankrate.com: How Interest Rates are Determined
- Bankrate.com: Interest Rates to Rise Eventually
- CNBC: Markets’ Next Worry May Be Rising Rates
- Federal Reserve Bank of St. Louis Economic Data. "Effective Federal Funds Rate." Accessed Oct. 13, 2019.
- Federal Reserve Bank of St. Louis Economic Data. "Inflation, Consumer Prices for the United States." Accessed Oct. 13, 2019.