When the Federal Reserve (Fed) wants to slow the economy it increases interest rates. This makes it more expensive for people and businesses to borrow money and they borrow less. That slows the economy.
To raise rates the Fed sells bonds. This pulls money out of the economy and raises rates.
The opposite happens when the Fed wants to speed up the economy. It buys bonds and lowers rates. This puts more money into the economy and makes it cheaper to borrow.
The Fed can also influence rates by changing the discount rate. This is the rate at which banks can borrow money from the Fed. By changing this rate the Fed can indirectly influence other interest rates in the economy.
The discount rate is just one of the many tools the Fed has to influence the economy. The Fed can also change the reserve requirement which is the amount of money banks have to keep on hand. By changing this amount the Fed can influence the amount of money that is available for lending and therefore influence interest rates.
The Fed can also use open market operations. This is when the Fed buys or sells securities in the open market. This can directly influence the amount of money in the economy and the interest rates.
The Fed has many tools to influence interest rates and each tool can be used in different ways to achieve different goals. The Fed can use these tools to slow the economy down or speed it up depending on what is needed at the time.
How does the Fed increase interest rates?
The Fed increases interest rates by buying and selling government securities in the open market.
How does the Fed decrease interest rates?
The Fed decreases interest rates by buying and selling government securities in the open market.
What does the Fed use to buy and sell government securities?
The Fed uses reserves to buy and sell government securities.
What are reserves?
Reserves are deposits that commercial banks have with the Federal Reserve.
How does the Fed increase the money supply?
The Fed increases the money supply by buying government securities in the open market.
How does the Fed decrease the money supply?
The Fed decreases the money supply by selling government securities in the open market.
What is the relationship between the money supply and interest rates?
An increase in the money supply decreases interest rates while a decrease in the money supply increases interest rates.
How does the Fed influence inflation?
The Fed influences inflation by changing the money supply.
How does the Fed influence unemployment?
The Fed influences unemployment by changing interest rates.
What is the relationship between inflation and unemployment?
In general inflation decreases unemployment while deflation increases unemployment.
What is the Federal Reserve?
The Federal Reserve is the central banking system of the United States.
What are the goals of the Federal Reserve?
The goals of the Federal Reserve are to promote maximum employment stable prices and moderate long-term interest rates.
How does the Federal Reserve promote maximum employment?
The Federal Reserve promotes maximum employment by setting interest rates.
How does the Federal Reserve promote stable prices?
The Federal Reserve promotes stable prices by changing the money supply.
How does the Federal Reserve promote moderate long-term interest rates?
The Federal Reserve promotes moderate long-term interest rates by buying and selling government securities in the open market.
