How Are Interest Rates Affecting Household Consumption and Savings?

This paper explores the optimal interest rates that could potentially maximize overall consumption and savings. I attempt to determine whether artificially low interest rates are positively or negatively affecting consumption. There has been speculation on whether the United States needs to raise the effective federal funds rate to provide financial institutions the incentive to lend money and increase household consumption. The Federal Reserve is currently keeping the effective funds rate between 0 and .25 in hopes of increasing consumption levels. This paper uses fifty years of interest rate data to narrow in on an optimal interest rate that leads to increased consumption levels, while taking into account numerous market factors. The empirical data suggests that the Federal Reserve is correct in keeping interest rates low, when attempting to increase consumption. There has been much research on this topic and on closely related subjects to consumption, savings and the real interest rate