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You may not know that political events such as inflation, employment report numbers, and presidential elections affect interest rates and lending rates. However, historical events of the past 100 years have a lot to do with today’s interest rates.
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You have probably heard these terms on television programs that report on the financial markets: prime rate, fed fund rate and discount rate. But if you are not quite sure what each one means, find out what these terms are and how they affect your current interest rates.
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The Federal Reserve controls the economy. The federal prime rate, or federal interest rate, is linked to mortgage rates, certificate of deposit rates and money market rates. The federal prime interest rate is generally seen as a lagging indicator, and financial institutions adjust their interest rates accordingly as economic conditions change.
The Fed interest rate is a measure used by banks, credit unions and other financial institutions to set loan rates. For example, if you notice that the prime rate has risen, your variable credit card rate is likely to rise soon.
When a bank approves a loan, it usually adds a margin – based on the risk level of the loan – to the Fed’s prime rate of profit. Historically, when economic growth was slow, banks lowered rates to attract new lenders. Sometimes banks offer lower than prime rates on secured loans to generate business.
The Federal Reserve does not play a direct role in determining the prime rate. The target rate of the federal funds, determined by the Federal Reserve, serves as the basis for the prime rate. When the Fed expects future inflation, it raises interest rates slightly to slow it down.
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In May 2017 – for the second time since December 2016 – the Federal Reserve raised the prime rate by a quarter point to 4 percent. Increasing confidence that the economy is ready for growth is one of the reasons why experts predict a rise in growth in 2017.
Over the past 100 years, the prime rate has been much lower and much higher than it is now. For example, in 1949 it was 2 percent. By 1968, the prime rate had climbed to 6.31 and in 1969 it had reached 7.95 percent. In 1981, it reached its highest point since 1949 – 18.87 percent. Although the prime rate swung around the 3 percent notch until 1958 – except in 1957 when it rose to 4.3 percent – it only reached it again in 2009 when it reached 3.25 percent.
By 1968, the prime rate had climbed to 6.31 and in 1969 it had reached 7.95 percent. In 1981, it reached its highest point since 1949 – 18.87 percent. Although the prime rate hovered around the 3 per cent notch until 1958 – except in 1957 when it rose to 4.3 per cent – it did not return to that range until 2009. when it reached 3.25 percent. The highest for the prime rate in 1980 was 21.50 percent.
Banks often lend money to each other overnight if they do not have a sufficient percentage of their customers’ money in reserve. Since those clients do not earn any interest on reserve funds, they usually keep it as low as possible.
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Members of the Federal Open Market Committee determine the target rate of the federal funds. As the federal fund rate rises, loans become more expensive and less money is available for bank-to-bank lending.
The mutual fund market developed in the 1920s, but banks were not the primary way to lend to each other. Instead, banks used stock market lending and so the call loan rate was the interest rate on such loans. With the Wall Street crash of 1929 and the onset of the Great Depression, the call lending market collapsed and rates stagnated. From December 1933 to April 1935 and from May 1936 to August 1946, call loan rates stood at 1 percent.
The Depression kept interest rates low in the 1930s and during the war years of the 1940s interest rates were pegged. It was only after the 1951 Treasury-Federal Reserve Agreement that the market for federal funds emerged as the main market for U.S. banks to borrow and lend money to each other.
The current fund rate is 0.79 percent, higher than 0.40 percent in 2016. From 1955, when it was 1.79 percent, until 2008, however, the rate was in the single and double digits. For example, the funded feed rate rose to 10.5 percent in 1974, 11.19 percent in 1979 and 16.38 percent in 1981. It has been declining steadily since 1985, and in 2009 it was at less than a. full percentage point shown: 0.16 percent.
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When banks cannot borrow money from other banks, they borrow from the Federal Reserve – the discount rate is the cost for financial institutions to borrow these short-term loans. The Federal Reserve sets the bank rate – the higher the rate, the more expensive it is for banks to borrow from the Fed.
The Federal Reserve offers three discount window programs to financial institutions: primary credit, secondary credit and seasonal credit – and each with its own interest rate. All discount rate loans are fully secured.
Currently, the discount rate is 1.25 percent, which was 1.02 percent in 2016. These rates are historically low – in 1950 the rate was 1.59 percent and in 1981 it rose to 13.42 percent. It reached its lowest level in 2009. points, 0.50 percent. Compare this information with 100 years ago, when the discount rate was 3.50 percent.
Mortgage rates are beyond your borrower’s control – the secondary market that buys and sells bundled mortgages sets it. Historically, mortgage rates have been linked to the Treasury yield, which is the interest rate the government pays to borrow money.
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Mortgage rates have fluctuated widely. For example, in 1971 you could get a mortgage with an interest rate of 7.54 percent – this rate continued to rise until 1981, when you had to pay an interest rate of 16.64 percent on a home loan.
After 1981, mortgage rates began to decline, but you still had to pay double digits until 1991, when the rate dropped to 9.25 percent. Considering that today’s mortgage rate is 4.05 percent, you will save a lot more now than you used to buy a home.
When you put money in a checking account, you are essentially lending that money to the bank, which is insured by the FDIC. The National Credit Union Association secures checking account funds held by credit unions.
Although some banks, such as online institutions, offer depositors interest on checking accounts, most do not. Banks that pay interest on checking accounts do not pay much. The typical interest rate for a checking account in 2010 was 0.11 percent and gradually dropped to today’s rate of 0.04 percent.
Where To Keep Your Savings To Accrue Interest
Banks pay customers interest on their savings accounts, but the rate is usually very low – this is because a bank can get money from the Fed at a discount rate. So it does not make sense that he pays you more than you would pay on a government loan.
During the housing bubble of the late 2000s, banks financed too many mortgage loans, which many believe led to the housing accident and eventual recession. They needed cash to pay off their home loan. They were reluctant to lend their surplus reserves and offered higher interest rates on savings accounts to increase their reserves.
Savings account interest rates have been declining since 2010 when the national savings account interest rate was 0.19. In 2017, the savings interest rate averaged only 0.06 – a rate that has remained stable since 2013.
Despite the low-rate environment, there are ways to get better savings account rates. Because of their lower overhead costs, online banks outperform national averages than traditional banks, and therefore often give savings to their customers in the form of higher interest rates. Ali Bank, for example, is offering a savings account rate of 1.25% APY from today.
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In addition to lower interest rates, the rates at which Americans save have declined over time. In 1959, according to the U.S. Bureau of Economic Analysis, Americans spent 10.30 percent of their disposable income on personal income. This number rose to 17 percent in 1975. In 2017, the personal savings rate is 5.90 percent.
Like savings account rates, CD and money market account rates have also declined over time, though not by much. In 2010, 12-month CD rates and money market rates were 0.71 percent and 0.29 percent, respectively. In 2017, 12-month CD rates are 0.24 percent and money market rates are 0.08 percent, as they have
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