Question 1

What are interest rates?

Accepted Answer

Interest rates are the price of money over time. You borrow a dollar today, you pay back more than a dollar later, and the gap is the rent on the dollar. That is it. The reason there is not one rate but a whole stack of them is that every loan has a different risk, a different duration, and a different counterparty. The Fed funds rate, the rate banks charge each other for overnight loans, sits at the bottom of the stack and anchors everything above it. Your mortgage rate is the 10-year Treasury plus a spread. Your credit card rate is the prime rate plus a much bigger spread. The Fed sets one rate. Every other rate is a markup, and the markup is what gets you.

Question 2

What is the difference between APR and APY?

Accepted Answer

APR is the simple annual rate. APY is the same rate after the compounding has been done for you. If a savings account pays 4% APR with monthly compounding, you actually earn 4.07% APY, because the interest you earned in January starts earning its own interest in February, and so on. The bigger the rate and the more frequent the compounding, the wider the gap. For deposit products, banks quote APY because it is the larger, friendlier number. For loans, they quote APR because it is the smaller, friendlier number. Same math, opposite incentive. When you compare a savings account to a CD, compare APY to APY. When you compare a credit card to a personal loan, compare APR to APR. Mixing them is how you talk yourself into the wrong product.

Question 3

What is the prime rate?

Accepted Answer

The prime rate is the interest rate U.S. commercial banks charge their best, lowest-risk corporate customers. It is not set by the Fed directly. It is set by the banks, but they all set it at the same place, Fed funds plus 300 basis points, and they move it the day after the Fed moves Fed funds. Right now Fed funds is 4.25%, so prime is 7.25%. The reason this matters to you, even though you are not a Fortune 500 borrower, is that almost every variable-rate consumer product in the country is priced as 'prime plus something.' Your home equity line, your variable-rate credit card, your small-business line of credit. When the Fed hikes 25 bps, prime moves 25 bps the next day, and your minimum payment on the HELOC moves with it the next billing cycle.

Question 4

How do interest rates affect the economy?

Accepted Answer

Rates are the throttle and the brake. When the Fed cuts, borrowing gets cheaper, mortgages and car loans pencil, businesses take on debt to expand, and the housing market and capex cycles light up. When the Fed hikes, the same machinery runs in reverse. Mortgages get expensive, refis stop, hiring plans get shelved because the cost of capital just went up, and demand cools. The transmission is not instant. The standard estimate is that a Fed move takes 12 to 18 months to fully show up in unemployment and inflation, which is why the FOMC is always trying to forecast where the economy will be a year from now, not where it is today. The Fed is steering a ship with a long tiller, and the wake takes a while to turn.

Question 5

What is a real interest rate?

Accepted Answer

A real interest rate is the interest rate after you subtract inflation. If your savings account pays 4% and inflation is running at 3%, your real return is 1%. Your dollar count went up 4%, but the basket of stuff your dollars buy got 3% more expensive, so you are only 1% richer in groceries. The headline number on the statement is the nominal rate. The number that determines whether you actually got ahead is the real rate. The Fed pays close attention to real rates because the nominal rate can look high while the real rate is still negative, which is what the entire 2021 to 2022 setup looked like: Fed funds at 0% with inflation at 8% meant the real rate was −8%, the most stimulative monetary stance in modern history. The hiking cycle that followed was the Fed dragging real rates back above zero.

Rate	Current level	What it prices	Spread vs Fed funds
Fed funds	3.64%	Overnight bank-to-bank lending	0 bps (anchor)
Prime rate	6.75%	Bank loans to top-tier customers	+311 bps
10-year Treasury	4.26%	Mortgages, corporate debt, discount rates	+62 bps
30-year mortgage	6.37%	Your house	+273 bps
HYSA (national average)	0.39%	Your cash savings	−325 bps
Credit card APR (average)	21.00%	Your unsecured revolving balance	+1,736 bps

Interest rates, ranked.

Interest rates, answered.

Interest rates, ranked.

Interest rates, answered.

Get the briefing in your inbox.