While it's not something you may think about often, interesti rates affect a large part of your life. Your mortgagei, car, even crediti card payments are based on interest rates. There's a good chance your investments may even involve interest rates. Lower interest rates can mean lower monthly payments or the ability to buy a larger home.

It's easy to see why people would like lower interest rates when they are making purchases. But those same people aren't so happy to see lower interest rates on their savings accounts.

What does the Fedi do?

The Fed (Federal Reserve Systemi) was created by the US Government in 1913 to govern the banking industry. It is charged with maintaining the nation's financial system (stability is the goal) and the nation's monetary policy. It is composed of a Board of Governors and 12 regional Federal Reserve banks. The Board of Governors is run by a chairperson who is appointed by the President of the United States. This chairperson traditionally chairs the Federal Open Market Committee (FOMC). The FOMC meets 8 times a year to decide how best carry out it's mission of keeping the US economy stable while working to lower unemployment ratei and moderate long-term interest rates. The Fed also has authority to set the

• federal funds rate: rate which banks charge each other for overnight loans.
• discounti rate: the rate banks pay when they borrow from a Federal Reserve bank

When the economy is growing quicker than what the Fed wants and there is a threat of inflationi, the Fed will usually raise interest rates. Then, when the economy cools and there's the risk of a recession or, God forbid, a depression the Fed will lower the interest rates in an attempt to spur growth.

When the rates are increased, the banks pay more for the money they borrow which means they charge you more money to loan money to you. Again, the other side is that when the costs to the bank drop, so will the costs to you.

That's why it's important to pay attention to the big picture when looking to buy or refinance your home. If the economy is slowing, then lower interest rates could be right around the corner so it's usually a good idea to hold off. If the economy is booming, then the rates are just going to rise so you should refinancei sooner rather than later.

How does this affect investing?

The biggest thing that people overlook in regards to interest rates and investing is in the area of bonds. Bonds are unique in that they move opposite to the interest rates. When interest rates raise, bondi prices lower, and vice-versa.