A:

Interest rates rarely increase during a recession. Actually, the opposite tends to happen; as the economy contracts, interest rates fall in tandem.

The Federal Reserve has tools to control interest rates. During a recession, the Fed usually tries to coax rates downward to stimulate the economy. When a recession is on, people become skittish about borrowing money and are more apt to save what they have. Following the basic demand curve, low demand for credit pushes the price of credit—meaning interest rates—downward.

The Federal Reserve

The Federal Reserve exerts major influence on interest rates. It can push rates upward or downward by adjusting the federal funds rate, which is the interest rate at which banks lend money to each other to meet overnight reserve requirements, and by buying or selling Treasury bonds (T-bonds). When a recession hits, the Federal Reserve prefers rates to be low. The prevailing logic is low interest rates encourage borrowing and spending, which stimulates the economy.

Supply and Demand

In a bad economy, consumers tend to become more fastidious with household finances. They are more careful about borrowing and more motivated to save the money left over after meeting expenses. This supply and demand dynamic creates an environment for low interest rates to thrive. When everyone wants to borrow money, interest rates tend to rise; the high demand for credit means people are willing to pay more for it. During a recession, the opposite happens. No one wants credit, so the price of credit falls to entice borrowing activity. 

(For related reading, see: How Banks Set Interest Rates on Your Loans.)

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