When interest rates go down, it becomes cheaper to borrow money, which means people and companies will be more likely to take out loans.
And as a result, they’ll spend more money.
That increased spending will fuel the economy and, hopefully, lead to the creation of more jobs.
How does raising interest rates help the economy?
The Fed lowers interest rates in order to stimulate economic growth, as lower financing costs can encourage borrowing and investing. When there is too much growth, the Fed can then raise interest rates in order to slow inflation and return growth to more sustainable levels.
Why do interest rates rise when the economy is expanding?
Basically, when the economy expands the Fed raises interest rates to control inflation. By doing that the Fed raises the cost of borrowing money, thereby reducing the money flowing in the economy.
Do interest rates go up during a recession?
Interest rates rarely increase during a recession. Actually, the opposite tends to happen; as the economy contracts, interest rates fall in tandem.
Why do interest rates rise with inflation?
Inflation and fed funds rate. In general, as interest rates are reduced, more people are able to borrow more money. The result is that consumers have more money to spend, causing the economy to grow and inflation to increase. As interest rates are increased, consumers tend to save as returns from savings are higher.