Originally Posted on July 30th 2007
We all know that the Federal Reserve (Fed) controls interest rates, but it is even more important to understand why they are adjusting them. Adjusting rates essentially increases and decreases the amount of money circulating within the economy. The Fed is acting as the throttle and the break for economic growth and inflation control. If the Fed can keep interest rates low, there will be more money in the economy, and if the Fed can send interest rates higher, there will be less money in the economy. This policy is supposed to work through bank lending, as banks will likely lend more money when interest rates are low because the price of credit is lower and lend less money when they are high because the price of credit is higher.
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