USA Interest Rates

By: EconomyWatch Content   Date: 10 November 2009

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The USA interest rates are determined by a central bank, called the Federal Reserve Bank (also referred to as the Fed). The monetary policies of the States are formulated by the Fed in order to influence the financial condition and thereby, achieve the macroeconomic aims of the country. These aims include:

  • Stable prices

  • High employment

  • Maximum sustainable economic growth

 

The fiscal policies of any country are decided by setting a target Bank Rate. The Federal Reserve Bank of New York sets an interest rate that it charges the other banks for short-term loans. The rate of interest the Fed charges the banks affect the rate that these banks charge their borrowers. These interest rates, in turn, also affect the economic activity and the rate of inflation.

USA Interest Rates: Deciding Factors

The factors that influence the amount the banks can lend and the USA interest rates are decided by the Federal Reserve Bank by:

  • Open market operations

  • Purchase of previously-issued government securities

 

When the Fed purchases securities, it injects money into the banking system, increasing the lending capacity of the banks and bringing down the fed funds rate. When the Fed sells securities, the opposite happens. The Fed’s influence over short-term rates creates conditions that are conducive to economic growth of the country. However, the volatile market and political scenario, at home and abroad, heavily influence financial decisions of households and organizations.

USA Interest Rates: Impact on the Economy

The amount of interest banks pay to the Fed is derived from the borrowers. Lower interest rates increase the purchasing power of the people. Since low interests leave more income in people’s hands, they invest on:

  • Homes

  • Furniture

  • Home appliances

  • Household inventories

 

This, in turn, boosts the economy to a great extent. The returns on investment in the future have greater worth when interest rates are low. Increased investment in businesses can lead to a larger and faster growth in the economy.

 

 





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