Interest rates reflect the price of borrowing money. The Federal Funds Rate, the interest rate for banks borrowing money from one another, is determined by the Federal Reserve. The Fed meets eight times a year to determine if they should change the interest rate, though they can meet more frequently if there’s a crisis (such as the economic meltdown in late 2008).

The most important factor in determining the interest rate is supply and demand. If many people are buying houses and cars, the demand for funds will be high because people want to borrow money to spend, and banks want to profit from that demand. So during an economic boom, interest rates tend to be high. In an economic downturn, interest rates are very low to encourage borrowing and stimulate the economy.

The Fed’s monetary policy dictates their decision on whether to “loosen” or “tighten” the money supply. The Fed has the power to inject money into the economy – essentially printing cash, which lowers the interest rate as there is now more money available to borrow. On the other hand, the Fed can also “tighten” the money supply, by buying bonds and essentially withdrawing money from the economy, decreasing the money supply and increasing the interest rate.

Another important factor in interest rate fluctuation is whether we are in an inflationary period. If the economy is threatened by high inflation, the Fed will increase the interest rate to discourage borrowing.

The interest rate should be important to a consumer who wants to borrow money and is also a key factor in understanding how our economy functions.