Interest Rates Continued

 Today, I"ll discuss various types of interest and what controls them.  One of the primary influence is the prime rate but there are other factors.

For instance, historically mortgage rates were influenced by treasury rates or the rate the government pays to borrow money but more recently, its based on a secondary market that bundles and sells mortgages.  At one point, mortgage rates hit a high of over 16 percent in 1980 but it slowly came down to around 3 or 3.5 percent.

Some financial institutions pay interest on checking accounts but there are only a few who do so and the interest they pay is very little.  This interest is what the bank pays to use your money while it is in the bank.  It began around .11 percent but dropped to .04 percent.  Banks do pay interest on money held in a savings account but the interest rate is fairly low because they can borrow money from the Federal government at a discounted rate.

For a while, banks were offering higher interest rates on savings accounts because they were writing lots of mortgages and rather than let their reserves drop, they used the increased interest rates to attract more savings deposits.  Once the housing bubble broke, interest rates on savings accounts have dropped to under one percent.

In addition, the interest offered for savings accounts have to be less than the interest rate for money loaned out, otherwise they cannot make a profit.  So in general, the higher the interest rates on mortgages and personal loans, the higher the savings interest and vice versa.

If students ask why the bank needs to make a profit, you can point out that the bank has to have money to pay for the building either rented or owned, has to pay for salaries of its employees in addition to benefits, utilities such as electricity, sewer, water, heat, and taxes.  The difference on the interest between what they loan out and what comes in is also used to help keep the reserves up as required by the federal government.

So know as a teacher you know more about how interest rates are set and why they are the way they are.  Let me know what you think, I'd love to hear.  Have a great day.