Mortgage Rates CD Rates Savings Rates Auto Loan Rates
v  
Product Loan amount 'City, State' or Zip Points Order By Order Direction

Relationship between Inflation and Interest Rates

Inflation is the loss of money's purchasing power. Prices go up -- including home prices -- but people have less purchasing power.

When inflation starts to increase the cost of goods and services at a pace that is too quick, the federal government -- namely -- The Board of Governors of the Federal Reserve System or "The Fed" for short, take action to increase interest rates in order to reduce demand.

By increasing (or decreasing) interest rates, the Fed is able to increase or decrease the supply of money and thereby control inflation.

The Fed achieves this by focusing on the Federal Funds Rate the interest rate which banks use to lend their excess reserves to one another. The Fed sets this rate of interest directly.

The Fed Funds Rate or the cost of money to banks directly affects the index rates that banks charge to consumers.


>>About Interest Rates