Helping our customers manage their finances in a healthy way is what Simple’s all about. And we apply the same principles to ourselves as we manage our business—balancing how much interest we can pay to customers with maintaining a healthy and sustainable business. That means responding to changes in the financial landscape, like the Fed’s recent lowering of interest rates. Learn more about the many considerations that drive interest rate changes—and what it means for you—below.
Why interest rates change
We all encounter interest rates in our financial lives, whether we’re paying interest—like on a credit card, student loan, or mortgage—or earning interest on money we’ve put into investments or interest-bearing bank accounts. Although sometimes you’re locked in to an interest rate (like the fixed rate you pay on your car loan or the rate you earn on certain investments like CDs), interest rates in general are constantly in flux.
Lots of factors go into determining whether rates change and by how much. While banks may offer slightly different rates, certain fundamental realities drive interest rate decisions for every financial institution.
The federal funds rate and the money supply
The Federal Reserve—aka, the Fed— is responsible for ensuring the stability of the US financial system and plays a pivotal role in determining interest rates through a couple different methods:
- Rates: Many people have the misconception that the Fed decides what rates banks offer. In reality, the Fed sets rates on the loans that banks take out from each other or the Fed itself, and that’s what affects how much it costs banks to do business—and, in turn, the rates they can offer customers.
- Money supply: The Fed regulates the amount of money flowing freely in the economy by buying and selling debt. This in turn directly affects other economic factors like inflation and supply and demand. Here are more details on how that works if you’re curious.
Responsible business practices
Could a bank decide to give customers a super-high interest rate on their investments and an incredibly low rate on loans? Sure! They’d probably get a ton of customers—until they quickly went out of business, that is. Banks, perhaps more than any other industry, must engage in responsible business practices so that they remain profitable enough to serve their customers sustainably. So when the Fed changes rates, supply and demand shift, and inflation ebbs and flows, responsible banks adjust their interest rates up or down accordingly.
How often rates change
Anyone looking to earn interest on their money is wondering, “When will interest rates go up or down?” The short answer is—there’s no way to know for sure. Banks have to consider many factors when setting rates—including their customer’s needs and what the competition is up to—so at any time they may decide it makes sense to change rates.
And it’s worth noting that the interest rates for certain deposits and loans change at different intervals. For instance, mortgage rates can change a little bit from day to day, while savings accounts tend to change their rates less frequently.
That said, there are some predictable factors that can help you make an educated guess. The Fed decides whether to change their interest rates every six weeks, so there’s a chance rates could change up to eight times a year. The Fed takes many factors into account when deciding whether to raise, lower, or keep rates the same, but things like the inflation rate and how quickly the economy’s growing are primary concerns—so finance experts pay close attention to make educated guesses. If you’d like to stay informed on these trends, check out sites like The Balance.
What rate changes mean for you
When the Fed cuts interest rates, chances are you’ll earn less interest on your savings, but also pay less interest on any debt you take on. And when they raise rates, your payments on loans and credit cards may be higher, but your savings will also earn more money.
Whether or not you benefit from changing rates will depend on how much debt you have, how much you’ve got in savings, and whether those loans and investments are in fixed- or variable-rate accounts. That’s why it’s smart to look at a variety of options for your money (you’ve heard it before—diversify!).
Borrow wisely: time it right
If you’re considering taking out credit for a big purchase, do some research on interest rate trends. If your budget can handle a bit of uncertainty, variable-rate loans or credit cards could be a good choice. But when interest rates are particularly low, it’s a good time to take out a fixed-rate loan (like a mortgage or car loan) so you can lock in that lower rate. Time your borrowing accordingly if you can.
Save smarter: diversify
To save money smarter, look at different types of savings tools in order to maximize the interest you earn. Consider keeping savings you need easy access to—such as your emergency fund—in a high-yield Protected Goals Account that earns a higher interest rate.
If you’re saving for something big over a longer period of time, you may be able to take advantage of a fixed-rate certificate of deposit (CD) to make your money work harder in the long term. Use savings you can afford to stash away for a while to buy a CD that gives you a guaranteed rate over time.
Disclaimer: Hey! Welcome to our disclaimer. Here’s what you need to know to safely consume this blog post: Any outbound links in this post will take you away from Simple.com, to external sites in the wilds of the internet; neither Simple nor our partner bank, BBVA Compass, endorse any linked-to websites; and we didn’t pay/barter with/bribe anyone to appear in this post. And as much as we wish we could control the cost of things, any prices in this article are just estimates. Actual prices are up to retailers, manufacturers, and other people who’ve been granted magical powers over digits and dollar signs.