Wednesday, 1 February 2012

Interest Rate Trends in US

Interest rates are determined considering the supply and demand of funds. If supply is in excess the interest rates fall and if demand is more than the supply the interest rates tend to rise. Other factors which govern interest rates include the economic growth and the life cycle which the economy is experiencing. Inflation is another important factor which manuevors the interst rates. As nominal interest rates have the effect of inflation in them. The quantity of money supply is another factor which hold importance in level of interest rates.
As far as the graph is concerned it has shown increasing trends from 1930 to 1980 and then the rates have fallen to approximately the same level in 2010. A maximum tick of around 16% has been hit by the interest rates in 1980s and the lowest is almost neglibile i.e. between 0 to 1%.
It is important to note that in economic recession the interest rates have fallen. The reason behind this phenomenon could be the decision of the FED to increase the supply of money to facilitate production and so that employment could generate and economy could perform well.
Some great recessions were experienced by the ecnonomy in 1930s and in 2007,08. The graph is evidend that the interest rates have fallen close to 0% during these periods. When the economy is experiencing a boom the interest rates have risen up. It could be due to demand pull inflation that the interest rates have risen and may be due to technological boom when the economy is performing well and more than the optimal level, the FED has decided to increase the interest rates so that borrowing could be discouraged. These trends are evidend from the above illustrated graph.

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