Essay about Interest Rates In The Economy

The inflation rate is constantly changing every day. The entire investment community is always on the look out for what the future inflation rate may be. It has been proven that a healthy economy preforms best when inflation rate is

The federal reserve has raised interest rates five times in less then twelve months, and the pervious raises are just barely beginning to take effect. The previous raises averaged around a quarter percentage point, and since these raises failed to slow the economy, Greenspan, unable to take anymore chances doubled the previous with a promise of more to come.

However, the bond rate isn't the only determining factor on your mortgage rate. The housing market itself has a great deal of influence on it as well. This impact is also the result of supply and

When considering how to set interest rates, the Fed takes many things into consideration. Firstly, it pays attention to the economy and how well things are going. If the economy is performing well, the Fed will raise short term interest rates to check against inflation. This slows the money supply, as business are less interested in borrowing at the higher rates (bankrate). It also takes into account the unemployment rate. Low unemployment is a signal that the economy is performing at capacity, and could therefore be subject to demand exceeding supply. When

Janet Yellen states, “the possibility that low long-term interest rates are a signal that the economy's long-run growth prospects are dim….depressed long-term growth prospects put sustained downward pressure on interest rates. To the extent that low long-term interest rates tell us that the outlook for economic growth is poor, all of us should be very concerned, for--as we all know--economic growth lies at the heart of our nation's, and the world's, future prosperity.” A high interest rate is usually set when an economy is already well off. An example of an economy that's well off is with the result of inflation. But if inflation is left unchecked it will lead to a loss of purchasing power meaning that your dollar is worth less than what it was before. This is where high interest rates become a great convenience to the economy. Though this may sound proficient, ultimately a high interest rate that lasts lead to struggles within the economy. Borrowing will become more difficult due to rates being to high which will also cause less productivity to

The Federal Funds Rate is arguably the most important interest rate in the world as it sets the tone in the market. This is the overnight interest rate used when banks borrow money from other banks or from the Federal Reserve. (Miller, 2016) If they do not have enough on hand to lend out, the Federal Reserve would be a place where banks can borrow money overnight. The rate is a tool used by the Fed to control the supply of available money therefore controlling inflation and other interest rates. (Fed Funds Rate: Definition, Impact and How it Works, n.d.) The higher the rate the more it costs to borrow money which lowers the supply of money. The lower the rate the less it costs to borrow which increases the supply of money. While it may seem natural that a very

Simply put, the level of interest rates affect economic decisions at every level, whether by the individual consumer, or a major corporation, or entire countries. First, we must look at the residential and commercial real estate market. Homeowners had a golden opportunity to purchase or refinance their homes between 2008 and 2015, when 30-year rates were at unusual lows. (CITE) This was of particular help when many homeowners suffered through “underwater mortgages” on homes worth less than the mortgages owed. Refinancing at a lower interest rate ensured millions of afflicted homeowners would be able to reduce their interest payments during such a troubling economic period. (CITE) But given the Federal Reserve’s likely decision to raise rates, homeowners will be at a disadvantage. The most recent (as of 12/9/2016) average 30-year fixed

Higher interest rates are never a good idea for a growing economy because it can directly impact it. Higher interest rates can affect

The Federal Funds Rate plays a huge role on the state of the economy in the United States. For something that has such impact on the whole economy in the United States, it is very little known and understood. The Federal Funds Rate may be the most important rate in the country. So what is the Federal Funds Rate? It is an interest rate that is used when banks lend to other banks or other depository institutions from “funds that are maintained at the Federal Reserve” (Target Rate). The transaction can only be done overnight and by trustworthy institutions. The target rate is determined by the Federal Open Market Committee (Target Rate). They will influence and determine the rate that will be used. So if it doesn’t have any first hand impact on a normal consumer or business, why should anyone care about it? The answer to that is simple, the Federal Funds Rate will greatly impact the economy in several areas and it will trickle down onto the normal consumer and business. The Federal Funds Rate will change the economy if it goes up, and if it goes down. As the year runs down, everyone will be watching with a close eye to see what the Fed will do with the rate. The Federal Funds Rate will increase in December of 2016.

Interest rate risk the price of the bonds changes because of the increase and decrease of the interest rates.

The interest-rate effect explains that when the price level decreases, consumers have more money left over after consumption (because prices have dropped) which they can then place in financial intermediaries (banks) who can in turn loan those funds out. An increase in the supply of

Interest rates have a major economic impact on the real estate market. Interest rates directly affect property sales. Residential property realizes the greatest affect as interest rates have a considerable influence on a homebuyer’s capability to purchase a new property. The customer is affected when there are significant increases or decreases in interest rates. Declining interest rates lower the costs of obtaining a mortgage; this in turn creates higher demand for homes, and pushes home prices up. Conversely, high interest rates increase the costs to obtain a mortgage; these increases lower the demand for homes, which creates a decline in home prices. (Stammers, 2016)

Interest rates are normally associated with inflation. Consumer spending and economic growth is encouraged as a result of low interest rates. However, inflation can occur if supply is lower than demand due to consumption increases but this is indeed not a bad outcome though foreign trade and investment will be lacklustre as opposed to the cash rate being higher which more likely attracts foreign investment and trade.

A: Investment spending depends on interest rates due to opportunity cost and risk. For example, when interest rates rise, the opportunity cost of your investment also increases. When interest rates are higher investors are willing to pay less for payment in the future. Which in turn leads to a lower rate of investment. The opposite can be said for falls in interest rates that are met will lower opportunity costs.

All things being equal, a long-term interest rates for short-term bonds experienced the largest price fluctuations vary. The price of the bond is the present value of all cash. The discount rate (the interest rate) changes, the impact is greater for cash flows over time.