I’m not an economist. I don’t know all there is to know about what goes into making the decision to raise interest rates or lower them. It’s complicated. But I do know and understand the basics, and these basics impact individuals. Economics can be boring, but at the same time it’s super intriguing to see how what seems to be one simple decision can make such a large impact.
The Federal Government has a committee of members elected to the Federal Reserve Board. They discuss interest rates and economic topics to determine if any action needs to be taken to keep the economy stable and happy. The biggest decision they make is whether to adjust the federal funds rate. This is the rate that banks charge each other on overnight loans. Currently, the Fed is trying to keep inflation under control.
The board is made up of seven members, all nominated by the president and confirmed by the Senate. While the committee is technically under Congress’ authority, they are not controlled by the government. There is one chairman who is appointed by the President and again, confirmed by Congress. This is currently Janet Yellen, which I’ll get to more on her and her awesomeness later.
The Federal Reserve Board has been in the news more frequently since late 2015 because they have decided the conditions are right to potentially raise interest rates. This hasn’t been done since 2006. Interest rates are kept low during times when the economy needs a boost. Think back to the Great Recession (2008/2009), interest rates were kept low to encourage spending and to get our economy moving again. Interest rates are raised during times of rapid growth. The Fed’s overall objective is to maintain steady growth, and their plan for achieving this is through a gradual increase of the federal funds rate.
The Impact.
When the Fed chooses to raise interest rates, the government is impacted the most. They are the largest borrower in America, therefore, they have the highest borrowing costs. However, this change will gradually impact consumer interest rates. Mortgage rates, auto loan rates, savings rates, etc. will all begin to gradually increase. This means it will be more expensive to take out a mortgage, finance a car, and pay off your credit card balance. But at the same time, you’ll earn more money on your savings. CDs and money market account interest rates will increase gradually as well.
By increasing the cost of borrowing and increasing the amount of money earned in savings, this decreases overall spending in the economy. If more money is being put into savings and paying down loans, there is less money available for spending. Remember, the goal the Fed is to stabilize rapid growth and maintain steady growth. Slowing down spending by increasing interest rates is how this is accomplished.
Who is this Janet Yellen?
Janet Yellen is currently the Chair of the Board of Governors for the Federal Reserve System. She is an economist and has the power to change our economy. In 2014, she was elected into her current term and is the first female to hold this position. She’ll serve her four-year term through January 2018 where she will be up for reappointment. Check out her profile in Forbes’ 2016 of The World’s Most Powerful Women.
The next scheduled meeting to announce whether the Fed will raise interest rates is November 2nd. Keep your eyes peeled!
Carolyn Rowland is a CERTIFIED FINANCIAL PLANNER™ passionate about empowering individuals to take control of their financial landscape. “We often tend to place our own priorities on the back burner for others, resulting in sacrifices we don’t often realize we’re making.”Carolyn believes in taking a values-based approach to financial planning. “Together we’ll define what matters most to you, what you want your life to look like, and develop a plan that fits your lifestyle.”
Carolyn Rowland is in the Milwaukee WI, area.
Sources:
http://www.foundationsforliving.org/articles/foundation/fedraiselower.html
http://www.economicshelp.org/macroeconomics/monetary-policy/effect-raising-interest-rates/
http://www.investopedia.com/articles/stocks/09/how-interest-rates-affect-markets.asp
http://www.nytimes.com/interactive/2015/09/12/business/economy/fed-rates-explainer.html?_r=0
http://www.fedprimerate.com/fedfundsrate/federal_funds_rate_history.htm#current