Roadmap · Level 5

Interest Rates

The cost of borrowing money, set largely by the Federal Reserve.

Interest rates represent the cost of borrowing money — set in large part by a country's central bank (the Federal Reserve, in the U.S.). When rates are low, borrowing is cheap, which tends to encourage spending and investing, often pushing stock prices up.

Picture it

At 3% interest

$300 of interest

At 8% interest

$800 of interest

The cost of borrowing $10,000 for one year. When rates rise, the same loan costs far more, so companies and families borrow and spend less. That's how rates ripple through the whole economy.

When rates rise, borrowing becomes more expensive for both companies and consumers, which can slow economic growth and put downward pressure on stock prices. This is why investors pay close attention whenever the Federal Reserve meets to decide on interest rate changes.

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