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Why Do Interest Rates Fluctuate?
Over the years, you’ve probably heard how the interest rate fluctuates. People are encouraged to take out mortgage or car loans when the interest rate is low. At some point, you’ve also probably wondered why interest rates fluctuate. Although the system is rather complex, there are some basic components that cause interest rates to rise and fall the way that they do.
Who Raises or Lowers the Interest Rate?
The Federal Reserve, which is the Central Banking System of the United States, is responsible for making sure that prices remain stable and that unemployment is relatively low. For example, if inflation is high in a particular country, the price for a package of tea that used to be the equivalent $3 may now cost $15.
Likewise, having high unemployment rates can also negatively affect the economy and general population. By keeping track of where the country’s economy stands in terms of its unemployment and inflation rate, the Federal Reserve can adjust course in order to keep the economy running smoothly.
When Does the Federal Reserve Lower Rates?
The Federal Reserve typically lowers interest rates when it wants to boost the economy and create job growth. By lowering interest rates, money becomes cheaper to borrow. This encourages businesses and people to take out loans, open businesses, and spend more. Having more money in circulation stimulates the economy and job growth.
When Does the Federal Reserve Raise Rates?
The Federal Reserve typically raises interest rates when it wants to keep inflation in check. If prices are rising fast, the Federal Reserve increases the rates, making it more expensive to borrow money. As a result, businesses and people tend to not buy so much. In return retailers slash their prices on goods and services, thereby keeping prices from continually rising. As a result, the American people can still afford necessary goods and services.
How Does the Federal Reserve Influence Interest Rates?
Now that you know why the Federal Reserve adjusts interest rates, you may be wondering how they accomplish this. The system can be quite complex, but it basically boils down to increasing or decreasing the money supply through open market activities. If the Federal Reserve wants to reduce rates, it buys government securities. Doing so causes an increase in the money supply. More money in circulation results in the cost of borrowing money to drop. Conversely, by taking out money that is in circulation, through the selling of government securities, the interest rate increases because in terms of interest, it becomes more costly to borrow money. This formula is not perfect. However, it does generally work. When the Federal Reserve manipulates the interest rates, most financial institutions fall in line due to open market influences. This is why you see rates are usually about the same across the board.
Can You Get a Lower Rate?
Usually, when rates decrease or increase, they do so across financial institutions. However, you can generally obtain interest rates that are lower through credit unions. Many people may not even know that credit unions offer better rates than banks. The reason for this is that banks, like most businesses, are for-profit institutions that reinvest their revenue into growing their business and increasing their stockholders’ earnings. Credit unions, on the other hand, are non-profit institutions that reinvest their earnings back into their banking services, allowing their members to receive lower rates. Credit unions typically offer membership to people based on similar vocations, belonging to a certain organization, or where they live. For example, credit unions can be established for teachers, or as is the case with our institution, for active duty and retired members of the Marine Corps, their families and households, and Department of Defense employees.
Interest rates rise and fall based on a very complex system that ensures the economic well-being of the country. When taking out loans, it’s essential to have a basic understanding of how the system works in order to save as much money as you can on interest. Regardless of where the interest rate is at the moment, credit unions can generally offer better rates to their members than most banks. However, membership is required. Many people may not even realize that they qualify to become members of a credit union. Doing your research is the first step to becoming financially savvy in order to reach your long-term goals.