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Why Interest Rates Go Up and Down?

Video Transcript, Youtube

The Reason Why Interest Rates Fluctuate

00:01 You may have noticed that interest rates
00:03 on loans and savings accounts can change
00:05 from time to time; for instance, one year
00:08 you might pay a certain interest rate on
00:10 a car loan, but the next time you shop
00:11 for a car that rate might be several
00:13 percentage points higher or lower; so,
00:16 what makes interest rates rise and fall?

00:18 Now the actual process is much more
00:20 complicated, but essentially interest
00:22 rates fluctuate mostly as a result of
00:24 things the Federal Reserve does to keep
00:26 our economy stable; the Federal Reserve
00:28 or the Fed is the central bank of the
00:31 United States, and it has two main goals
00:33 to keep prices stable; that is to make
00:36 sure inflation doesn’t get out of
00:37 control and to encourage job creation
00:39 when employment is low;

00:39 When a lot of…
00:42 people are out of work, the Fed might try
00:44 to encourage job creation by pushing
00:45 interest rates down; when interest rates
00:48 go down, it becomes cheaper to borrow
00:50 money which means people and companies
00:52 will be more likely to take out loans;
00:54 and as a result, they’ll spend more money
00:56 that increased spending will fuel the
00:59 economy and hopefully lead to the
01:01 creation of more jobs. Think about it
01:03 this way;

01:04 When you buy a home; you might also hire
01:06 movers and painters, maybe buy some new
01:08 furniture and plant some flowers from
01:10 the garden center, and a person who sold
01:12 you the home, needs a new place to live;
01:13 so, they might do the same; the net effect
01:16 of all this spending helps create new
01:18 jobs.

01:18 On the other hand, if inflation is
01:21 high and prices are rising too fast, the
01:24 Fed might try to slow down the economy
01:26 and steady those prices by pushing
01:27 interest rates up; when interest rates go
01:30 up, it becomes more expensive to take out
01:32 a loan; in turn, people will be less
01:34 likely to borrow money, and they’ll buy
01:35 fewer things, meaning there will be less
01:38 demand for goods and services which will
01:40 cause sellers to drop their prices; and
01:41 as a result, those prices will stabilize.

01:44 By encouraging interest rates to rise
01:47 and fall at certain times, the Fed is
01:49 trying to stabilize prices, create jobs,
01:51 and keep the economy secure.

01:54 Understanding why rates might rise and
01:56 fall, can help you make more informed
01:57 financial decisions.

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