This article will go over why the federal government cuts and raises interest rates in order to affect the economy. If you’re curious about how these actions will have an impact on you as a consumer, keep reading below. 

Economic Theories

When the government cuts interest rates, the cost of borrowing money decreases and encourages businesses to take out more loans. This is one of the basic economic theories behind the government’s actions. 

That same principle also works in reverse when an economy is thriving. When interest rates change, there are many ways both consumers and businesses change their spending habits to boost their finances. 

Bonds 

When interest rates are lowered, the bond market is directly impacted. Monetary gains from bonds tend to fall, making them less attractive for new investors. Bond prices always rise when interest rates decrease. 

The Prime Rate 

When the federal government’s interest rate increases, the prime rate always sees a boost as well. The prime rate refers to the credit rate that banks give to their customers with the best credit rating. 

Credit Card Rate 

Working alongside the prime rate, credit card rates are a bank’s way of determining which of their customers are most trustworthy. Rates will go up or down for credit cards and other loans  after thorough research is done of their customers’ risk assessment. Short-term borrowing will always have higher rates of interest than longer-term loans. 

Auto Loan Rates 

Car companies see positive economic growth from the government’s zero-interest-rate policy, but rising benchmark rates can have impacts as well. 

Lower interest rates should boost car sales in theory, but these bigger purchases might be put on the back pedal for consumers as the need to prioritize more basic needs are met first. 

Mortgage Rates 

Interest rate hikes sometimes send home borrowers to look for a new home and take advantage of a fixed loan rate. But mortgage rates usually go up and down based on Treasury notes, which are largely determined by interest rates. Simply put, when interest rates go down, so do mortgage rates. It’s cheaper to buy a home with lower mortgage rates. 

For All Consumers

The big takeaway here is that fluctuations in interest rates have impacts in all sorts of ways for consumers. Higher credit card rates and savings rates usually mean a downturn in consumer purchasing overall. When interest rates go down, consumers can purchase things on credit for a lower cost. The Bureau of Labor Statistics is a good place to learn more information about how interest rates cause a domino effect for consumers in different ways.