“NEW YORK (CNNMoney) — Interest rates are now hovering near record highs, at an average rate of 14.72%. And if your credit is bad enough, you could even end up with a rate as high as 59.9% APR.
That’s because while the CARD Act helped crack down on certain fees and requires more disclosures, it didn’t cap every credit card holder’s worst enemy: interest rates.”
LIBOR is an acronym for the London Interbank Offered Rate, a short-term interest rate that top-quality banks offer each other for loans. The rate changes all the time, and is usually expressed as a 1, 3, or 6-month rate for U.S. dollars.
Annuities are contracts, or a form of investment, between two parties. The investor makes an investment and the financial institution (usually an insurance company) agrees to repay the investor, with interest, over different time intervals. Typically, you would make either one lump-sum payment or a series of payments to your insurance company, and in return the insurance company would pay back your investment at agreed points in time and an agreed interest rate. There are three types of annuities: fixed, variable and equity-indexed annuities.
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.
At any given time, there are countless different interest rates for countless different transactions at countless different institutions. The government doesn’t control all of them – how could it? But then how can you say the Fed has raised or lowered interest rates?
The Fed, or the Federal Reserve, is the whole country’s bank. It operates out of 12 different locations and it lands money to commercial banks, which in turn land money to us. The Federal Reserve Board is the agency that controls this bank and its job is to maintain a secure financial system throughout the country. The Fed’s primary concern is to regulate our economy’s rate of growth – if the economy grows too quickly, we get swamped by inflation, and if it grows too slowly, we could enter a recession.
Because the Fed lands money to all other banks, its interest rate affects all other interest rates, which adjust to accommodate the Fed’s behavior. So when the Fed decides the economy is growing too fast, it raises its own interest rate – raising all other interest rates in a kind of domino effect – and slows down spending that way. If the Fed wants to try to increase economic growth, it lowers its interest rate, which usually increases spending. While interest rates can vary from institution to institution, they’re all proportional to the country’s most important interest rate: the Federal Reserve’s.
Macroeconomics is the study of overall trends in the economy: unemployment, interest rates, price levels, and growth rates.