what makes interest rates so low currently?

[Goldy1]

My paypal account is paying 0.05%. Why even bother paying anything? I only keep a small amount in there as a portal for some of ym things I no longer need etc. I sell on e bay. I remember it being around 5% many years ago.

What financial principle dictates interest rates?

[kork13]

Bank account interest rates are primarily influenced by the Federal Reserve's "Federal Funds Rate". Basically, it's the rate banks charge to loan money to eachother. Right now, that rate's target is officially "between 0% - .25%", which means banks can get money VERY cheaply from other banks/the government. So if they can get money for 0%, why would they want to give us (depositors) a rate significantly more than that? The primary reason some banks still do is to retain/attract their depositors.

A few years ago, (as recently as mid-'07), the fed rate was 5.25%. It changes based on alot of factors, but one of the simplest ones to demonstrate is inflation. The fed rate is designed to control money flow (higher rate = less money is working its way around the banking system). As inflation (or the perceived risk of it) falls, as it has over the last 2 years, the rate falls as well, because it's safer to encourage money flow. However as inflation picks up, there's too much money in the system, so the fed tightens the money supply by raising the fed rate. Back in the early 80's, when inflation was going nuts, the fed rate was as high as 18% or so.

Clear as mud? hopefully that makes some sense for you....

[Broken Arrow]

Yes, what kork basically said.

I just want to add that banks themselves can also decide on their own interest rates. Some banks, for various reasons, need to grow their deposit base more than other banks, and to entice new money, they will offer a higher interest rate than others.

That's basically why most banks have different interest rates.

[jasonnoguchi]

To put in absolute layman terms,

Higher interest rate = bad for economic expansion

Lower interest rate = good for economic expansion

The reason interest rate all over the world is so low is because the world needs to get out of the recent recession by stimulating economic expansion.

[kork13]

Originally Posted by jasonnoguchi

To put in absolute layman terms,

Higher interest rate = bad for economic expansion

Lower interest rate = good for economic expansion

The reason interest rate all over the world is so low is because the world needs to get out of the recent recession by stimulating economic expansion.

...and to put it bluntly, stashing cash in a savings account doesn't do much for "stimulating economic expansion". Conclusion: the true patriots will take all their cash and go on a shopping spree.

[jasonnoguchi]

Originally Posted by kork13

...and to put it bluntly, stashing cash in a savings account doesn't do much for "stimulating economic expansion". Conclusion: the true patriots will take all their cash and go on a shopping spree.

As an economist by profession, I MUST AGREE WITH YOU!