|
The United States Federal Reserve, commonly referred to as "the
Fed", was created by the United States Congress formally to help
provide the U.S. economy with a stable and flexible financial system.
In its' purest sense the Fed was created to ensure a good economy
while keeping inflation to a minimum. While the Fed sets rates,
it only dictates short term rates (Over-night banking rates and
Treasury bills and bonds). Short term rates affect long term rates
in just a short period of time. The Fed changes rates in response
to inflation. An increase in inflation just indicates that your
money buys less for the same product or service. When McDonalds
raises the price on Super Size Fries by a quarter, that's inflation
knocking!
When interest rates are increased or decreased it dictates how
much interest people will have in purchasing goods or services.
If a rate is decreased, things become more affordable and the number
of goods or services sold increases. In affect more money changes
hands. Common sense would tell you this is a good thing, wouldn't
it. I can afford more; therefore I can get more toys. If you think
about it further, if everybody had money to buy things, we would
slowly run out of goods and services. The law of supply and demand
kicks in, the provider of goods or services would in turn be able
to charge more. Eventually, if this got out of hand, McDonalds would
scrap the Dollar menu for the Two-Dollar menu, then it would be
the Three Dollar menu, and four, so on.
When interest rates rise, fewer goods and services are trade. Less
people are willing to pay a lot of money for an item and less items
are sold. Interest rate rises in affect curb inflation.
So what does this tell us as far as our savings accounts online?
If you are enjoying good rates, thank you inflation. If you are
not, come on Two-Dollar Menu! In English, if the Fed starts to drop
rates consistently, start looking for longer term CDs to secure
you good rates.
|