Question: Why Do Interest Rates Fall During A Recession?

During a recession, the Fed usually tries to coax rates downward to stimulate the economy.

When a recession is on, people become skittish about borrowing money and are more apt to save what they have.

Following the basic demand curve, low demand for credit pushes the price of credit—meaning interest rates—downward.

How does a recession affect interest rates?

Interest Rates

Decreasing economic activity is consistent with decreasing demand for borrowing. This lack of demand pushes interest rates downward. In addition, the monetary policy exercised by the Federal Reserve during a recession is to increase the money supply to push down interest rates.

Do mortgage rates go down during a recession?

An existing mortgage may be affected by a recession. However, if a mortgage is a fixed-rate, fixed-term loan, it will be unaffected. However, adjustable rate mortgages that are tied to indexes (like the LIBOR or Prime) will be at the whim of the fluctuating interest rates during a recession.

What does the Fed do during a recession?

The program is designed to make borrowing cheaper for businesses and consumers when the Fed sells short-term U.S. debt and takes the cash to buy long-term U.S. debt. Fed Chairman, Ben Bernanke, said that additional Fed action may be required if unemployment doesn’t fall below 8.2%.

Why does the Federal Reserve cut interest rates when the economy is in a recession?

Why does the Fed cut interest rates? The Fed lowers the fed funds rate to stimulate the economy by making it cheaper to borrow money.