The Federal Reserve has announced that it will keep interest rates at near record lows. With signs of continuing economic recovery the Fed has maintained its policy of making funds available for the market. Interest rates are the percentage of money earned by a lender from a borrower.
The US economy remains weak and to increase consumer spending the government and banks have adopted a policy of lower interest rates. Consumers are encouraged to make loans or mortgages to put money back into the economy. This is turn will help revive consumer confidence and put life back to the ailing economy.
When people invest their money in a bank through savings or CD’s the fund in turn is used by the bank to fund projects or investments. A bank thus pays you interest for the funds invested in the bank. There are two major types of interest rates, general interest rates and specific interest rates for mortgage or Certificate of Deposits. CD’s interest rates are determined by length of time, risks and availability of money from other sources. The Federal Reserve has offered to keep its low interest rates giving banks an easy access to funds with low interest rates. With money and funding available through the Fed, short-term investments are competing with Fed rates thus the low-rates we see today.
Below are factors which affect Interest Rates in general
The most important factor determining interest rates remains to be the Federal Reserve. The Fed functions as an instrument of maintaining the health of the US economy in general. The Fed uses the total amount of money or reserves available to influence market and economic conditions through various policies. They have recently announced that it is making funds available for financial institutions. This has pushed interest rates lower for both government and private loans.
Future interests movements help determine market movements in terms of interest rates. Daily market movements dictate shifts in short-term interest rates. With existing economic conditions interest rates remain low because the economy remains weak. This is why interest rates remain low for short term investments. Consumer sentiment remains weak and there is no great demand for loans or credits for new purchases. Long term interest rates remain higher, however, because of three main factors. The length of time for which the money is on loan, risks, such as the money not being repaid and other sources which are available for funding.
Global companies or governments play a major role in determining interest rates in the United States. Foreign investors lock in huge amounts of funds in the US economy and help drive funding for business. When there is a large supply of funds available through foreign investments interest rates go down because there is no pressure to raise funds through local investments.
Low inflation rates push interest rates lower. High inflation rates mean that money borrowed today has lower spending power in the future. When inflation rates are high, lenders hike interest rates to offset money devaluation. Inflation rates have been low this past year, with decreasing consumer spending and weak production numbers
Improving economic numbers and growing sentiment that the American economy is recovering has failed to improve interest rates on savings and CD’s. The Federal Reserve announced that it will keep its interest rates to spur growth. Many Americans have turned to savings or CD’s as a way of investing or earning profit. Traditional investments such as CD’s which in the past offered a good return on investments with their relatively high interest rates are performing weaker today.