Interest rates aren't what they used to be; rates a year or even a month ago are different from those prevailing today in our financial markets. That's because interest rates flex with the ebb and flow of general economic activity. Interest rates also change in response to the expectations borrowers and lenders have about the future level of prices. Changes in the dollar's value on foreign exchange markets or in interest rates abroad and, of course, the closely watched monetary policy actions taken by the Federal Reserve, all have a pronounced impact on the level of U.S. interest rates. There are, indeed, a host of factors that feed into determining the general level of interest rates.
Interest rates play an important role in our market economy. As signals direct the flow of a city's traffic through a complicated grid of intersecting streets and avenues, interest rates channel the flow of funds from savers to borrowers. Usually, the funds flow through financial intermediaries such as banks, mutual funds and insurance companies.
A balance is struck between the demand for funds by borrowers and the supply of funds from savers by an ever-adjusting level of interest rates. Changes in the quantity of funds available to finance the spending plans of borrowers as well as changes in borrowers' demands for funds alter interest rates which, in turn, affect the levels of consumer and business spending, income, the Gross National Product, the employment of resources and the level of prices. Clearly, interest rates have a tremendous effect on our economy.
Download
The Basics of Interest Rates
