Interest rates

All about interest rates and its relationships with other financial indicators :)

• Relationship with Inflation

  The Fed lowers interest rates to:

  • Kickstart the economy (↑ Inflation) (Stronger labor market)

  • Lowers cost of borrowing (Banks will lend more → People and companies are more willing to invest and spend).

  The Fed raises interest rates to:

  • Calm down an overheating economy (↓ Inflation) (Weaker labor market)

  • Increases cost of borrowing (Makes buying certain goods and services, such as homes and cars, more costly → Consumers will spend less). 

• Relationship with Currency

  Higher interest rates → Stronger currency

  • Example: Japan raises interest rates → attracts more money from overseas since there is a higher yield. 

  • ↑ Demand for the Yen = ↑ Yen value.