Few times a year, the news about the Fed raising or lowering the interest rates are heard throughout the news. This action creates a big chain reaction that would set into motion, like a domino effect. If interest rate rises, banks raise their prime rate, which also affects mortgage rates, car loans, business loans, and other consumer loans.
How and why it happens
The Federal Reserve System or simply “The Fed,” is the central bank of the United States. The Fed is an independent entity, and is created by the Congress to provide a safer, more flexible, and more stable monetary and financial system; basically, they have controls over the movement of money throughout American finance.
Like what was said earlier, the Fed has control over the raising or lowering of the interest rates, and whatever they do will affect the entire financial system drastically. They essentially have two primary goals: full employment and stable prices. They seek to achieve these goals through monetary policy that could either decrease or increase the money supply.
The fed is trying to maintain a healthy economy. If the economy is “very slow” the Fed might decide to lower the interest rate that makes money more available to businesses, home buyers, and consumers. If the economy is “speeding up” and is growing too quickly, they will raise interest rates to slow things down.
Inflation is another factor to the change in interest rates. Inflation takes place when you have too much money and going after too few goods. The Fed raises and lowers interest rates to help keep inflation under control. Restricting the amount of money that are available for people to spend is one tool to keep inflation under control.
If interest rates increased from 6% to 14%, most likely, less people would be buying or building homes and the sale of supplies would decrease. If interest rates decreased from 14% to 6%, people would probably be storming the banks in a rush to borrow “cheap” money to build new homes, buy cars, and invest in businesses.