What is interest rate？

When you borrow money from a bank, you usually agree to pay for the service。The fee is expressed as a percentage of the total loan amount and is called the "interest rate."。Interest is basically the cost of borrowing money。

For example, if a small business owner applies for a $40,000 loan to start an ice cream shop, they may accept a 5% APR, meaning they will repay the $40,000 loan along with $2,000 in interest (assuming they can pay off the loan within a year).。Additional interest payments may also be required depending on the terms of the loan and monthly payments。But in general, the sooner the loan is paid off, the less interest is paid。

Why do banks charge interest?？

Interest is a way for banks to make money。Banks can help the economy by lending to small businesses and individuals who want to buy cars and homes, among other things.。

In addition to charging interest on loans such as credit cards, student loans or mortgages, banks make money through a variety of fees, including late payment penalties, ATM withdrawal fees or account service fees。Some banks also offer investment services and charge commissions for processing these transactions。

How the Fed gets involved？

S. central bank or the Federal Reserve affects interest rates in an indirect way, as we mentioned above。Instead of determining interest rates on credit cards or student loans, the Fed sets the "federal funds rate," the rate at which depository institutions (also known as banks and credit unions) charge each other for overnight borrowing.。Banks may borrow the money to meet reserve requirements or to address short-term needs.。

When news anchors and economists talk about interest rates, they usually refer to the federal funds rate。Whatever changes in the federal funds rate usually have ripple effects on the broader economy。

The Federal Reserve uses the federal funds rate for fiscal purposes, it raises interest rates to control inflation and control financial risks。As interest rates rise, loans become more expensive and people are less willing to borrow。If the economy comes under pressure, the Fed may lower the federal funds rate, making it cheaper for individuals and businesses to borrow money。

Does the Fed change the 2020 federal funds rate?？

Yes, in March 2020, the Federal Reserve cut the federal funds rate twice through the Federal Open Market Committee。On March 3, the Federal Reserve cut interest rates urgently, lowering the target to 1.00-1.25%。That day, the New York Times called it a "preemptive move to protect the economy from coronavirus."。But as COVID-19 spreads, Fed decides to do more。On March 15, 2020, the Fed cut its interest rate target again, cutting the federal funds rate to zero..00-0.25%。

Interest rate adjustment is a double-edged sword

When the Fed lowers the federal funds rate (aka interest rate), individual banks may modify their prime rates。The prime rate is the prime rate that banks must offer and is usually reserved for the most reputable corporate customers。Typically, the prime rate is the same across banks and is used to set interest rates on certain consumer loans。While the prime rate is roughly the same, deposit rates tend to vary across banks。

Lower interest rates are a double-edged sword。It might be cheaper for you to get a new loan or pay off your credit card。But if you have a savings account, the interest on this money may be reduced。

Can interest rates be negative?？

可以。In some parts of the world, countries have experimented with negative interest rates。For example, in 2019, the European Central Bank, the euro area central bank, imposed a -0.5% interest rate。The move aims to encourage eurozone banks to lend more to businesses and individuals。The Bank of Japan has also used negative interest rates before.。

As of press time, the Fed has never pursued a negative interest rate policy。

What other tools does the Fed have at its disposal?？

In addition to cutting interest rates, the Fed announced a massive stimulus package at the time, promising to support the economy by buying as much government debt as possible, including billions of dollars worth of U.S. Treasuries (also known as Treasury bills) and mortgage-backed securities.。On March 20, the Fed also said it would buy corporate bonds to prop up U.S. businesses.。

What will the Fed do next?？

The Federal Reserve, with its dual mission of maintaining price stability and maximizing sustainable employment, is in a difficult position。Lowering interest rates could lead to inflation, but at the same time, a looming threat is that the unemployment rate could reach 20-30 percent by the second quarter of 2020, according to Fed officials.。What is certain is that the longer COVID-19 lasts, the greater the impact on the U.S. economy and people.。

Right now, we need advances in technology, health care, but in the meantime, the Fed may take action to support businesses of all sizes。Some economists have suggested that the Fed could work with the Treasury to help support small businesses, which are beyond the scope of their normal activities.。

Even with Fed Chair Jerome Powell taking the lead, it is difficult to predict the Fed's course of action, which will largely depend on how Congress allocates money to the American public and manages a possible industry bailout.。These factors are likely to have a greater impact on the economy, which the Fed can then react to。

For now, like much of the world, the Fed is waiting to see how things unfold。Until we move further from the global slowdown and the recovery from COVID-19, it may be impossible to know if the Fed's policies have had the desired effect。