Interest Rate
The percentage charged by a lender for the use of money, or paid by a financial institution on deposits.
What is Interest Rate?
An interest rate is the amount a lender charges a borrower for the use of assets, expressed as a percentage of the principal over a given period — typically annually. Interest rates are set through multiple mechanisms: the Federal Reserve sets the federal funds rate (the benchmark short-term rate), which influences all other rates in the economy. Nominal interest rates reflect the stated rate; real interest rates adjust for inflation. Interest rates affect every corner of the economy: higher rates slow borrowing and spending, reduce asset prices, and strengthen the currency; lower rates stimulate borrowing, investment, and economic growth. The yield curve — a chart of Treasury interest rates across maturities — is a critical indicator of economic expectations.
Example
When the Federal Reserve raised the federal funds rate from near 0% to 5.25–5.50% between 2022 and 2023, mortgage rates climbed from roughly 3% to 7%+, sharply reducing home affordability. A 30-year mortgage on a $400,000 home at 3% requires a $1,686/month payment; at 7%, the same loan requires $2,661/month — a $975 monthly increase driven solely by the rate change.
Source: Federal Reserve — Interest Rates