Understanding the Reasons Interest Rates Change

Understanding the Reasons Interest Rates Change

You may have read the news that at its June 2016 meeting the Federal Open Market Committee (FOMC), a subgroup at the U.S. Federal Reserve (often called “the Fed” for short), decided to leave interest rates unchanged. Some members of the group signaled that they may still raise rates once or twice before the end of the year, though, so if you are thinking about purchasing a home, being able to understand why interest rates go up and down can help you decide if now is the right time to buy, or if it might be better to wait a little while and hope that rates go down.

Crash Course in Interest Rate Economics

The main driver for any interest rate changes is the economy, and generally speaking, the FOMC makes its decision on whether to raise, lower, or keep interest rates that same based on economic data and forecasts for things such as hiring in the labor market, total economic growth, oil prices, and consumer spending power. Since some of these things are very difficult to predict far in advance, the FOMC meets about every six weeks to assess the economy and discuss policy options.

Examining Market Factors

Oil prices dipped in 2015 and while they have increased slightly since the absolute low from last year, there are reports that this year we will see the lowest summer gas prices in more than a decade, averaging just $2.27 a gallon. For the average driver, this signals good news for your wallet, but lower prices also mean a slowdown for the job growth in the energy sector, which was a major job driver for the past few years. As with any significant reduction in hiring and job growth, this can impact interest rate changes.

Inflation is another factor that the FOMC usually looks at the determine whether to raise interest rates. Inflation causes money devaluation—meaning that $100 will buy you less tomorrow that it does today if inflation goes up. When inflation is low, investors can make a better net return from their overall returns than when inflation is high. With inflation only rising at about 1.6 percent a year, well below the Fed’s target of 2 percent, it seems likely that interest rates will remain low.

Supply and demand also plays a factor, since interest rates can be boiled down to the cost to borrow money. If there is high demand and many people who want to borrow money (as there would be in a strong economy), the price to borrow will go up. When there is low demand (as there is in a recession or during slow economic growth), the price to borrow money will go down or remain low.

Determining when interest rates will change is difficult, even for the most seasoned policy and lending experts. For that reasons, most mortgage loan advisors would recommend that you take advantage of the current low rates right now rather than waiting and hoping that they will go even lower. Talk to the experts at City Creek Mortgage today about whether a no-cost refinance loan is a good option, or whether it’s time to take the leap and buy a home instead of renting.