Low interest rates benefit individuals or investors who own or want to buy assets; in that regard they disproportionately benefit wealthier Americans
Interest rates are now lower than they have been in quite some time. Interest rate fluctuations influence so many things in the economy and personal finances that it's worth reviewing how the ripple effect of falling rates could possibly effect you and your family.
The "Good" when interest rates are low?
It is less expensive to purchase items with debt - in particular the purchase of a new car or home. These purchases are fuel to economic growth. Recent rate reductions have brought 30 year fixed rates in the low 3% range - which will likely encourage new rounds of mortgage rate refinancing for many families.
Low interest rates bring down the risk of business going into debt by lowering the cost. Public companies issue new bonds at lower rates, smaller companies get SBA loans or unsecured personal loans at lower costs.
Investors have a wide choice of asset classes to invest in. When rates are low it makes bond yields less appealing - meaning investors are more likely to choose stocks as an alternative. Low rates are generally associated with rising stock prices due to the increased attractiveness of stocks versus bonds.
The "Bad" when interest rates are low?
Low rates means that things that are generally financed with debt (like cars and houses) are more affordable. The downside of this is people are willing to pay more to purchase these items than they would have if rates were higher - which is how inflation happens.
If you are dependent on a fixed income stream (such as an annuity or pension) which is not indexed for inflation, the rise of prices is negative because your fixed income stream will buy less.
Existing bonds become less attractive to buy or own because of low yields and the chance that higher rates in the future will hurt returns.
It's helpful to understand that the federal funds rate is both the gas and the brake used by the Federal Reserve to control economic growth and inflation. When the Fed reduces rates, it is effectively putting the gas pedal down on the economy in an attempt to increase economic activity. The opposite is true for raising rates - it's usually an attempt to slow down economic activity and reduce inflation.
