All Things Interest Rates

All right.

Welcome back.

So today, Logan, we're going back to the classroom, [school bell ringing] um, because it is Friday.

And I think this is a great one Ian threw out as an idea for this week.

Where in the world do interest rates come from? And I think this is awesome.

You hear all the time, especially this year, I feel like it's been more prevalent in a lot of, like, daily life instead of just background noise that all the finance bros talk about, right? W- That interest rates are rising or falling, and they're gonna hike rates, they're gonna cut rates, they're hawkish, or all these fancy terms.

So I wanna take an episode to break that down.

What does the average investor need to know about interest rates? So I can kick it off if you want.

Um, this is more your wheelhouse than mine, I will admit.

So in general, what you have to know about interest rates is most people think when the Fed, meaning the Federal Reserve, gets together and they raise rates, that what they're doing is they're personally going to each bank and saying, "Hey, you've got to start charging more for a mortgage," for example, because we are trying to control the money.

That's not exactly what happens.

Um, the Fed ... does dictate rates, but those rates are only on the fund that they can control, which is the bank rate.

And then the banks are the ones who then say, "Okay, well, if it's more expensive for us to borrow money from the Fed, then we're going to make it more expensive to push off some of that cost to our borrowers." So it's almost like it's not an immediate, like, snap your fingers, they're deciding it, but it is, like, a very logical progression where if the Fed raises rates, oftentimes shortly after the banks raise rates.

And so it almost feels that way to the average consumer.

So why in the world do we care about this? Why does it matter? Well, we talk about this a lot in, like, our weekly news segment, especially in our business, Logan, but oftentimes the Fed is raising or lowering interest rates to try to incentivize or disincentivize consumers from going out and spending money.

So in raising interest rates, what they're really doing is they're making it more expensive for banks who are then making it more expensive for consumers to have debt.

And in doing that and making it more expensive for consumers to have debt, they're making it where people are more likely to tighten their wallets.

They're not gonna go out and spend a billion dollars on all the things that they don't need, because it's more expensive.

But as they do the opposite, as they lower rates, they're making debt cheaper, which then motivates people if they can get debt cheaper to go ahead and take out debt, to go ahead and spend money.

And so in doing that and just maneuvering one rate, the lending rate to the banks, what they're actually doing is the average Joe, you and I, Logan, going to the grocery store, in a very long [laughs] term approach, they're kind of controlling how motivated we are to spend money or to not spend money.

In the next vignette, the role of Petey is being played by the Federal Reserve.

You're killing me, Petey.

You're killing me.

Yeah, I think that makes a lot of sense, and I think it's easier for us, it's easier for the listener to conceptualize it exactly how you said, like you and I, what you and I do.

But in actuality, what is really moving the market is what is happening with businesses.