The Chairwoman of the Open Market Committee of the Federal Reserve Bank, Janet Yellen, announced today that the prime lending rate will almost certainly be increased this year, based off strong labor market data and economic growth around the United States.
The Federal Funds Rate has been set near 0% for the past several years as part of the Fed’s efforts to use monetary policy to help the economic recovery in the United States. This interest rate is used to determine the interest rate that banks use to lend cash to each other, which also influences the interest rates that companies and people can borrow money.
The lower the interest rate, the cheaper it is to borrow money, so companies can borrow more money to expand, and people can buy more houses (and more houses are built). However, if people are borrowing too much money, it will eventually lead to too much risk in the economy. The Fed generally raises interest rates while the economy is growing strongly, and lowers them when the economy is having trouble.
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