A person may borrow, lend, or deposit money
After a certain period of time, that same person may be compelled to pay (borrower) or receive (lender) a part of the amount borrowed or lent. Interest rates refer to the percentage that the lender receives from the borrower, or the person who deposited money, after a set term. The total interest charged is determined by the principal borrowed or deposited, the length of time lent or deposited, and the frequency of compounding.
According to Bernanke (2016), the interest rate is the percentage of a sum of money that a lender charges the borrower
It is always represented as an annual percentage. Therefore, the rate the lender or any other financial institution charges to borrow their money, or that rate at which the bank may be paying its depositors for keeping their money with them is often referred to as the interest rates. The interest rates are determined, set and often change depending on the financial stability.
How interest rates are determined
Interest rates are significant because they regulate the flow of money in the economy. For instance, a high-interest rate checks the issue of inflation, however, they can also slow down the economy of a nation. A lowered interest rates may stimulate the economy, but on the other hand, it can also lead to inflation. It is, therefore, an important step to make sure that all the financial agencies determine the interest rates so as to maintain the financial stability of the nation.
Kimberley Amadeo, a contributing author of The Balance, contends in her article, How Are Interest Rates Determined?
There are the three major forces that determine interest rates. They include the Federal Reserve, The United States Treasury notes and bonds (investor demand) and finally the banking industry. In the United States, the Fed funds rates are set by the Federal Reserve which often impacts on the variable interest rates and the short-term interest rates. The fixed and the long-term interest rates are impacted by the demand treasury notes and bonds of the United States. Banks on their side offers mortgage and loans that can alter the interest rates. A good example is an instance where a bank or any other financial institution may increase the interest rates on credit card if a person misses a payment.
Who Sets the Interest Rates
The Federal Reserve sets the interest rates. The Fed is the US' central bank, and like other central banks, it has many roles that include conducting a monetary policy as well as regulating banks. Monetary policy here means that the agency has the function to control and regulate the money supply. The main aim of the monetary policy of the Fed is to make sure that the issue of inflation is well checked as well as keeping the problem of unemployment as low as it can. Whenever the Fed or the US' financial agencies forecast inflation, it conventions the money supply to cut off inflation in the nation (Coopersmith & Gambardella, 2016). When unemployment is on the rise, or the economy is slowing down, the Fed act by increasing or expanding the money supply to incentivize firms to invest and the consumers on their side to use.
All the explained control of money do not happen that simple
It happens through setting up and manipulating the interest rates. The Federal Reserve exerts control over the money supply so as to get its intended aim. The interest rates are established by a setting of the target federal money rate. The federal maintains that the banks ought to be keeping a particular set amount of money with them (deposit with a Fed Bank). The deposits are also called the Federal Reserve funds.
Where the interest rates are found
The interest rates are found in all central banks as well as government's financial institutions. The data and the information on the interest rates are updated every now and then. The banks receive the federal commands as well as the new tariffs, and it is upon the financial institutions to comply for the better of the consumers. Consumers can, therefore, get the up to date interest rates in the financial institutions.
How often the interest rates change
Interest rates are impacted by the economic environment or the financial markets, and hence, like the financial markets, they can change severally in a single day. Daily economic indicators influence the variations in the interest rates ("How often do the interest rates change? - Amerisave Knowledge Base", 2017). The rates are published and updated every day and as quickly as possible depending on the variations in the market.
Regarding the variable rates, the interest rates climb and down as a result or in response to the variations in the cash rates. If the money prices get down or decrease, they tend to reduce the interest rates paid and hence, making the variable rates always to go down. In cases where the cash rates are increased, the variable rates may go up hence forcing a customer to pay more. The frequency at which the interest rates changes is therefore very high as they often change several times in a single day.
Reference
Bernanke, B. (2016). What tools does the fed have left? Part 1: Negative interest rates. Brookings Institution (blog).
Coopersmith, M., & Gambardella, P. J. (2016). Interest Rates and Inflation. arXiv preprint arXiv:1603.08311.
How often do the interest rates change? - Amerisave Knowledge Base. (2017). Amerisave.com. Retrieved 8 July 2017, from https://www.amerisave.com/knowledgebase/rates-and-cost/rates/how-often-do-the-interest-rates-change/
Who Determines Interest Rates?. (2017). The Balance. Retrieved 8 July 2017, from https://www.thebalance.com/how-are-interest-rates-determined-3306110
