September 13, 2011 – Interest rates affect the price we pay for mortgages, home equity loans, credit cards, car loans, or anything else we buy with borrowed money. While there is no specific answer to what makes interest rates go up or down, there are certain factors considered when setting interest rates.
The Federal Reserve Banks play a major role in setting interest rates across the nation by influencing the availability and cost of money to help set nationwide economic goals. High interest rates curb inflation and slow the economy, while low interest rates stimulate the economy, but can lead to inflation. The Fed will price interest rates accordingly to either slow or stimulate the economy.
The general state of the economy also plays an important role in the movement of interest rates. The federal government tracks key economic indicators, such as consumer confidence, consumer spending and unemployment, and reports on them each month. These indicators gauge how well the economy is doing now and how well it may do in the future. In a booming economy, interest rates tend to rise and in a sluggish economy, they typically drop.
The supply and demand of funds also determines interest rate movement. If the demand for borrowing is higher than the funds available, lending institutions can raise their rates to curb demand. On the other hand, if they have excess funds, they may lower their rates to attract borrowers.
While no one can predict with certainty what will happen with interest rates from day-to-day, economists are always ready to offer their opinion. Here’s a simple rule of thumb followed by industry professionals to predict what interest rates may do: if bond yields are down at the end of the day, interest rates will most likely rise the next day – and vice versa.