Interest rates are more than just numbers—they’re a powerful economic lever that can influence consumer behavior, business investment and the broader pace of economic growth. Set primarily by central banks like the Federal Reserve, interest rate adjustments send signals that ripple across lending, saving and spending decisions.
When interest rates decline, financing becomes cheaper and typically leads to increased consumption (think: home, vehicle, and credit card purchases) and investments. Similarly, when interest rates rise, borrowing costs increase and consumers tend to spend less. This can slow overall demand and help curb inflation.
Consumers can also benefit from interest rate hikes by receiving higher returns on savings with a bank, such as in their checking accounts and CDs. Additionally, lenders and creditors will likely earn more interest when they lend money to businesses, individuals, or institutions.
The Federal Reserve raises or lowers its key interest rate to control economic growth, combat inflation, and ensure that prices remain stable. However, it’s important to note that there are many factors that can impact these rates, including inflation, market conditions, and global economic developments. As a result, there’s no guarantee that the Fed will raise or lower its key interest rate at any given time.