This is mainly regarding US economics and the news. I frequently heard (especially the last couple months) about how the US interest rates went up/down.
Also it seems that interest rates are sort of used as a measure of the “health” of the economy? But why? What do interest rates mean for the economy overall? What are the impacts of a rising/falling interest rate on the economy?
In: Economics
The federal funds rate is set by the Federal Reserve or the simply put the countries bank. This is the rate at which banks borrow from the US Government.
The prime rate is directly correlated to this rate.
When the economy is struggling rates fall so that it becomes less attractive to save (as bank deposits yield lower returns) and more attractive to borrow. This borrowing results in economic activity that will help improve the health of a struggling economy. This could come at the expense of inflation as spending tends to increase. The demand for goods and services outpaces the supply and prices will rise to offset.
When the economy is healthy and/or there is a need to slow inflation, rates will rise. The intention is for there to be the opposite effect. Variable debt gets more expensive (mostly credit cards) resulting in less collective disposable cash for the economy curbing spending. Lending becomes more expensive discouraging people from borrowing and thus spending. Lastly fixed income investments and bank deposits become more attractive as they now pay more interest or dividends. Demand will decrease and inflation will slow as a result of less demand for goods and services.
This is a simplistic explanation, there are other variables and policies that impact the economy.
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