Interest rate is the rate at which interest is paid by the borrower for the money which is bought from a lender. It affects the economy by influencing stock and bond interest rates, consumer and business spending, inflation, and recessions. Any changes in the interest rates can have both positive and negative impacts on the U.S markets. Financial institutions are very much exposed to interest-rate risk because of mismatches in the maturity periods and repricing terms of their assets and liabilities.
Interest rates have been declined since the early 1980s and reached a bottom at the end of 2008. This made the businesses to issue debt or equity as the price of borrowing has decreased. Financial services firms have benefited from the federal rate cuts over the past few years. U.S Federal Reserve Open Market Committee has lowered both the target federal funds rate and the discount rate in response to the growing credit crunch. This led to the increased borrowing money from banks by the customers.
Recently, the Standard and Poor’s rating services opines that, interest rate fluctuations pose inherent risks for all financial institutions. Following the adverse recession, rates in the U.S are low and have no where to go but up. However, there is a belief that banks and other financial institutions (brokers, asset managers, exchanges, and clearinghouses) could benefit from higher interest rates. Interest rates in the U.S seem self-assured to increase, but the federal reserve is likely to do so gradually to minimize adverse effects on the economy.