What is happening with US interest rates?
EPA/ShutterstockThe US Federal Reserve has held interest rates steady at 3.75% - 4%.
The decision comes within a week of the midterm elections and after the central bank raised interest rates for the first time in three years at its September meeting.
What is the Federal Reserve rate?
An interest rate tells people and businesses how much it costs to borrow money – such as with credit cards, mortgages, or business loans – but also what return they get for saving cash.
The Fed influences interest rates in the US through its target range for the federal funds rate, which is the interest rate used by commercial banks for overnight borrowing.
How does the Fed rate affect mortgages, credit cards, and savings?
The Fed uses interest rate changes to try to keep inflation – the rate at which prices change – at 2% a year and keep the job market stable.
When inflation is too high, the Fed tends to raise interest rates.
This tends to mean higher rates from banks and other lenders, which in turn affects spending and saving decisions.
For example, someone refinancing their mortgage or buying a property for the first time could face higher mortgage rates. It could also mean higher interest rates on credit cards or car loans. However, it means higher interest rates on savings as well.
This encourages people and businesses to save more, spend less money, and make less investments. It also encourages companies to hire less people or slow the pace of pay rises.
All of this tends to reduce demand and slow inflation.
When inflation is low or if the Fed believes the economy needs a boost, it cut rates.
The idea is that this will have the opposite affect, with banks dropping rates leading to more spending and less saving from people and businesses.
How much have US interest rates changed?
US interest rates have historically moved around quite a bit.
The last time Fed rates were as high as they have been recently was in the lead up to and during the start of the 2008 global financial crisis.
The Fed then dropped rates to historic lows to encourage spending and job creation during the economic slump and kept them at those lows for several years.
They picked up again ahead of the pandemic before dropping to as low as 0%-0.25% during the pandemic. They then rose to highs of 5.25%-5% from the middle of 2023 to August 2024 as inflation jumped.
They had been falling steadily since then, until rates were raised last month.
