Rates Current as of Friday February 10, 2012

« How Do Interest Rates Affect the Economy?

How Does Inflation Affect the Level of Interest Rates? »

How Does the Health of the Economy Affect Interest Rates?

The health of the economy affects interest rates by influencing the supply of, and the demand for, credit. For example: People’s incomes fall in a recession, so the amount they save also decreases. The demand for credit by business generally declines in a recession, as business spends less on new buildings, equipment, and inventories. Also, the Federal Reserve acts to reduce interest rates during recessions, in order to stimulate economic activity. All other things held constant, the rising demand for credit in expansions pushes interest rates up. If the rates that consumers and businesses have to pay to borrow rise too rapidly, however, spending may decline, leading to an economic slowdown.

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