Interest rate levels are a factor of the supply and demand of credit: an increase in the demand for money or credit will raise interest rates, while a decrease in the demand for credit will decrease them.
And as the supply of credit increases, the price of borrowing (interest) decreases.
What happens when interest rates fall?
There is an inverse relationship between bond prices and interest rates, meaning that as interest rates rise, bond prices fall, and as interest rates fall, bond prices rise. This means that demand for lower-yield bonds will drop, causing their price to drop.
Why do interest rates change?
Interest rates also can vary because of inflation. When determining the interest rate to charge borrowers, lenders factor in their estimates of what future price levels will be in order to ensure lenders will profit from the loan. High inflation, or anticipated inflation, will result in higher interest rates.
What causes mortgage rates to fall?
Mortgage securities begin to sell off and prices fall. But because of the “see-saw” inverse relationship between bond yields and bond prices, as prices fall, yields rise. Those rising yields are a direct influence on mortgage interest rates. Inflation causes higher prices for everything, including home loans.
Why did the Fed lower interest rates?
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. Rates on credit cards and home equity lines of credit track the fed funds rate closely and provide more spending power for Americans.