Interesting Interest Rates

Q What makes interest rates go up and down? — C.N., Worcester, Massachusetts A Interest rates are strongly influenced by inflation and the debt market (think Treasury notes, bills, bonds, etc.). Inflation has been low in recent years, averaging about 3 percent annually over decades. Interest rates have started inching up, but are still below average. After all, the prime rate topped 20 percent in 1980. When the economy appears to be growing too briskly, the Federal Reserve can slow growth and keep inflation in check by hiking shortterm interest rates via the “federal funds” rate — the rate a bank can charge another bank for use of its excess money. The Fed also sets the “discount rate” — the rate banks pay it to borrow short-term funds. When the economy is sluggish, the Fed will often try to juice it by lowering rates, encouraging companies and people to borrow (and spend!) money. The prime rate, mortgage interest rates and other interest rates are often directly or indirectly influenced by the federal funds rate or the discount rate. The money markets themselves (basic supply and demand for credit) also exert great influence over interest rates. *** Q I’ve saved a little money, and I want to invest in stocks. What do I do? — O.A., Shenandoah, Iowa A First, pay off any high-interest-rate debt and fund an emergency account with at least several months’ worth of living expenses. Meanwhile, read up on investing. Perhaps start with Joel Greenblatt’s “The Little Book That Still Beats the Market” (Wiley, $25) or John Bogle’s “The Little Book of Common Sense Investing” (Wiley, $25). You can learn about good brokerages at our new site, theAscent.com. Want more information about stocks? Send us an email to foolnews@fool.com.