Question by batnat20: What is the significance of the Federal reserve banks cutting or raising interest rates?
With a lot of the economy in the news, there is plenty of talk about the Federal Reserve banks cutting interests rates. What exactly does this mean when rates are cut and even raised and what kind of effect on the economy is this intended to have?
Best answer:
Answer by cory314159
Control of bank interest rates is the single most direct impact the government can have on the economy.
Rate cuts are designed to stimulate the economy, This works because the Federal Reserve drops the interest rate it charges to bank to borrow money. When they do this, banks in turn lower the interest rates they charge to consumers. This in turn generally stimulates more spending in the economy. Think of it this way, someone wants to buy a home for 150k. At an 8 percent interest rate, thier mortgage would be $ 900 a month, which they cant afford. At 6.5 percent, the payment would be 750 a month which they can afford. The lower interest rate just created a home sale. Those are just example figures, but enough to get the idea.
The risk of lower interest rates is high inflation, more people buying generally drives prices up, if prices go up to much, you run the risk of more problems than you solved. Hence, raising interest rates is generally a tool to cobmat inflation, or slow the economy to a sustainable pace.
This is a very simplified explanation. But hope it helps.
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Tags:Banks, Cutting, Design, Federal, home, Interest, Raising, rates, Reserve, Significance, Sustainable
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