The Federal Reserve met yesterday, and as has been a common theme of the year so far, interest rates remained unchanged. They stress that this does not mean they are confident in the economy; they just have current reservations changing rates. The interest rates being referred to have a two-prong effect on the country.
The first is that they are the government bond yield rate. This means that when someone buys government bonds the current interest rate determines how much they will receive on top of their initial investment. These rates within themselves affect the yield rate on bonds purchased from companies.
The reason is that when the government’s rate changes, private companies must adjust to stay competitive. This is a bigger deal than it sounds because the government bonds have a zero percent default rate, meaning that you are guaranteed to get your money back. Bonds bought from companies come with the risk of not being paid back but, the riskier the bet the more an investor stands to make.
The second effect is on banks. The interest rate is how much people make on the money they save in the bank and how much interest they will have to pay on loans.
This means that banks suffer in times of low rates because they are making very little money on each single loan. Many critics believe rates have been too low for too long and that they are strangling banks. But on the other hand, people tend to react harshly when rates are raised. This leaves the Fed in a hard position, in respect to future decisions.