Most Americans are familiar with the idea of the Fed raising or lowering interest rates, and most know that it involves manipulating the market for some purpose or another. But with the exception of people whose occupations involve cars or real estate and those searching to buy or sell either one personally, few have taken the time to really examine and understand what the variation in interest rates means to ordinary Americans and how it personally impacts them. Contrary to popular belief, the manipulation of the interest rate has far-reaching effects and impacts on most people, and in many ways they did not previously expect.
What Does it Mean?
First of all, it helps to have a basic understanding of the rate itself. The interest rate in this case involves the Federal Reserve and the rates at which banks borrow. Financial institutions have a minimum balance the law requires them to keep. When they are short, they may borrow from the Federal Reserve. There is a specific rate of interest charged for borrowing that money. When the rates are low, the low rate is passed down to the consumer; when they are high, the consumer bears that too. As a result, low rates are generally more favorable to the consumer seeking to purchase large items that will involve a loan.
How it Affects the Consumer
Bankrate, a financial publisher since 1976, publishes stories monitoring federal currency issues and has listed several ways in which interest rate hikes or declines affect the consumer. These effects include:
� The overall price of goods and services: To fight inflation, when the economy is doing well the rate rises, to slow demand and keep prices from rising too drastically.
� Employment: Raising the rate slows the economy and also slows hiring and wage increases; again, this is seen as another way to fight inflation.
� Credit cards: The average credit card rate is generally based on a formula attached to the prime rate. As a result, when rates fluctuate at the Fed, so do APR rates for cards.
� CDs: Certificates of deposit rely heavily on the Fed rate to determine their own. Thus, when the fed rate is low it becomes difficult for retirees especially who want to live off the income of the deposits.
� Auto Loans: Auto loans are established in relation to the federal funds rate.
� Mortgage rates: Surprisingly, mortgage rates are not as affected by fed rates, but instead rely much more on traditional market forces.
� Home equity: Home equity lines, however, are connected closely to the prime rate.
For personal financial purposes, the Fed is an enormous presence. Most major interest rates are at least indirectly related to the Fed rates, and for consumers, a basic knowledge and keeping track of the rates may go a long way to saving money in the long run.