Q:

What happens to interest rates during a recession?

A:

Interest rates usually fall during a recession. One reason for this drop in rates is that the Federal Reserve deliberately tries to get the rate down to help stimulate the economy and encourage spending.

One way the Federal Reserve brings interest rates down is by setting the Federal Funds Target Rate, which is the interest rate between banking institutions. The Federal Reserve also buys lots of government bonds, which causes the price of these bonds to rise. There is an inverse relationship between bond prices and interest rates; when one rises, the other falls. The ultimate force in driving down interest rates is consumer hesitation to borrow money in a recession. As more money becomes available for borrowing, the interest rate drops.


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