Biggest Interest Rate Drop in a Decade
Everyone loves low interest rates, even Wall Street. Investopedia says,
The lower the interest rate, the more willing people are to borrow money to make big purchases, such as houses or cars. When consumers pay less in interest, this gives them more money to spend, which can create a ripple effect of increased spending throughout the economy. Businesses and farmers also benefit from lower interest rates, as it encourages them to make large equipment purchases due to the low cost of borrowing. This creates a situation where output and productivity increase.
Chief Market Analyst for Compass in the Bay Area, Patrick Carlisle, provided the charts below to show the interest rates trend over the years:
The bottom line is, interest rates affect the economy by influencing stock and bond interest rates, consumer and business spending, inflation, and recessions.
However, it is important to understand that there is generally a 12-month lag in the economy, meaning that it will take at least 12 months for the effects of any increase or decrease in interest rates to be felt. By adjusting the federal funds rate, the Fed helps keep the economy in balance over the long term.
Photo: Quicken Loans
Understanding the relationship between interest rates and the U.S. economy will allow us to understand the big picture and make better investment decisions.