How are interest rates determined?
Interest rates fluctuate based on a variety of factors, including inflation, the pace of economic growth, and Federal Reserve policy. Over time, inflation has the largest influence on the level of interest rates. A modest rate of inflation will almost always lead to low interest rates, while concerns about rising inflation normally cause interest rates to increase. Our nation’s central bank, the Federal Reserve, implements policies designed to keep inflation and interest rates relatively low and stable.
Interest rates, whether those that you are earning (deposit account) or paying (loan), are determined by a number of components. Here are the most important factors for each type of interest rate determination. Savings/Deposit Accounts The most important factor in deposit interest rate determination is the competition. A related component is the institution’s need for deposits. These factors are really intertwined. For example, your bank or credit union wants to increase its deposits. It’s not difficult. They will offer deposit account interest rates higher than much or all of the competition. The money will come in, guaranteed. If the institution has no specific purpose for more deposits, they will typically offer interest rates equal to the lower options offered by their competition. This reduces their “cost of funds,” which allows them to lower their loan interest rates or generate more profit. Loans and Lines-of-credit Think of loan interest rate pricing as if you were managing a r
Interest rates fluctuate based on a variety of factors, including inflation, the pace of economic growth and Federal Reserve policy. Over time, inflation has the largest influence on the level of interest rates. A modest rate of inflation will almost always lead to low interest rates, while concerns about rising inflation normally cause interest rates to increase. Our nation’s central bank, the Federal Reserve, implements policies designed to keep inflation and interest rates relatively low and stable.
