There are a number of factors that play into an economy, successful or otherwise. One very important element is control of interest rates. Many, however, have little idea of how their banks actually arrive at the rates they offer.

Federal Reserve

A key factor in the rise and fall of interest rates is the Federal Reserve Bank, the bank responsible for the monetary and financial systems in the United States. However, despite the name, the Federal Reserve, or Fed, is not a government organization. They are a private bank working with the government.

Interest Rate Control

The Fed has direct control of short-term interest rates and regularly adjusts them up or down to help stabilize the nation's financial system.

Up and Down

The Fed regulates the interest rates based upon whether or not the economy is growing or contracting. If companies are making profits, unemployment rates are low and consumers are spending, short-term rates rise in order to prevent inflation. In contrast, a slow economy will lead to interest rates falling to make it less expensive to borrow money, both for businesses and individuals.

Passing the Buck

Depending on the interest rate set by the Fed, banks adjust their own rates accordingly, with cuts or raises in interest rates eventually making its way to consumers by way of loans, credit cards, etc.

Other Factors

Interest rates aren't governed by the Fed alone. While sporadic, other factors arise such as crises in commodities markets (such as oil, wheat, silver, etc.) that directly affect the economy in the United States (such as an oil shortage). These incidents can potentially affect the interest rate, depending on the severity of their impact.

Source:

Bankrate.com: How interest rates are determined

thetaoofmakingmoney.com: Interest Rates For Dummies

More Information:

The Federal Reserve Board of Governors