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The main factor influencing interest rates is inflation. When
the growth of the economy is too strong (fast) inflation increases,
and when the economy doesn't’t grow fast enough, inflation
decreases.
The Federal Reserve changes the interest rates
accordingly to either lower inflation and slow the economy, or
to give it a boost. Higher inflation is always associated with
economic growth, since there is more demand for goods and services,
which causes price increases of those goods and services.
Different interest rates.
There are many different interest rates, and they don’t
always have to change at the same time. The most important ones
are:
Federal Funds Rate – the interest that banks use to charge
each other.
Prime rate – offered by banks to their “very good
customers.”
Treasury bill rates – the interest paid by the U.S. government
on its short term instruments used to finance its debt.
Treasury Notes and Bonds – long term instrument rates used
to finance government’s debt.
Six month CD rate – interest paid to an
average person when they invest in a six month Certificate of
Deposit.
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Economic data and interest rates.
Many economic events have an impact on inflation, thus indirectly
affecting the direction in which interest rates move. The most
important are:
Inflation rises when:
The Consumer Price Index goes up.
Durable goods orders increase.
The Gross National Product rises.
Production rises.
Inflation goes down when:
Unemployment rises.
Business inventories go up.
Price of the Dollar rises.
Other factors that influence rates.
The simple law of supply and demand has enormous impact on interest
rates of particular products like mortgage
loans or credit cards. The rates of credit
cards have remained high, even though other interest rates
are still very low. This is due to the high demand for this type
of credit.
See also: interest
rate changes, rollover
401k, 401k
investments options, Roth
IRA, credit
card rates
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