The U.S. Federal Reserve is capable of having a major effect on interest rates, by taking measures to adjust the amount of funds which are available in the economy. Its actions are taken with the intended effect of both maintaining good economic conditions and avoiding excessive inflation. Other economic factors can also have an effect on rates as well.

According to federalreserveeducation.org, the Federal Reserve takes steps to change how much credit and money are available in the United States economy, which has an impact on interest rates. It accomplishes this by buying or selling government securities, as well as directly changing its “discount rate” or bank reserve requirements. The web site federalreserve.gov states that the “discount rate” refers to the rate which individual banks must pay the Federal Reserve bank’s regional lending facilities to obtain short-term loans. This can have an indirect effect on other interest rate levels. Reserve requirements, according to wikipedia.org, are Federal Reserve regulations which determine how much money banks must keep (ready to be withdrawn) rather than lending it.

Federalreserveeducation.org also indicates that the Federal Reserve’s goals in adjusting interest rates are to bring about growth in the economy, prevent unemployment, and keep prices from rising or falling. More money in the economy, and lower rates, can cause inflation. Greater inflation and reduced interest combine to discourage money from being saved, with consumers preferring to spend it immediately. On the other hand, a higher interest rate has the effect of discouraging purchases made with credit. Thus the Federal Reserve has to carefully consider the different effects adjusting rates can have on the economy and try to determine the best compromise between high or low rates.

However, the Federal Reserve isn’t the only economic force which can have an effect on interest rates. Like any product or service, if not enough people are willing to pay interest at a particular level, banks will have to lower the rate. For example, if hardly anyone would sign up for credit cards with interest in excess of ten percent or car loans higher than six percent, banks would most likely lower the rates regardless of what the Federal Reserve might do. On the other hand, if banks feel that consumers are willing and able to pay higher rates, they may be increased. A wide range of economic conditions involving wages, prices, competitors, etc. can change how high interest customers find acceptable.