The Fed and Interest Rates

Length: 4 Pages 1031 Words

Date: To: From: Subject: THE FED AND INTEREST RATES Introduction Changing the interest rates is definitely a good monetary policy for the Fed to use when slowing down or speeding up the economy. The government would want to speed up the economy when the economy is in a recession because the goal of the Fed is to promote economic growth. On the other hand, the economy will want to slow down the economy when the economy is growing so rapidly that the inflation rates are rising rapidly as a result. Economic decisions, such as monetary policy, are all part of a game, but in this game there is no way to see what is going to happen. All one can do is guess what they should do to encourage economic growth. Background Information on Newspaper Article According to economic analysts, the Fed is expected to lower the interest rate from its current 4% down either a half-point or a quarter-point. This will be the first time since 1994 that the Fed’s key rate has been below 4%. According to the paper, “Just how worried the Fed still is about U.S. companies’ shrinking earnings will be evident in the size of this week’s cut…” From this expectation of lowering the interest rate, one can derive that the Continue...

On the other hand, when the interest rate is low banks loan their money cautiously. In this papers case, the economy is guessed to be in a recession so the government must increase the money supply in order to increase the aggregate demand. On the other side, when the economy is expanding too rapidly that inflation increases rapidly, the economy's aggregate demand and its actual output exceeds its potential output. Now that both sides have made their argument, what really happens to the economy when interest rates are changed and which argument is economically sound Briefing on Monetary policy Monetary policy is a tool used by the Fed to increase or decrease the supply of money with the intention to expand or slow down the economy. In order to lower the nominal interest rate the government increases the supply of money by doing things such as purchasing government bonds. Lower interest rates are very beneficial for a company when interest rates are low. This is because when the interest rate is high banks loan money aggressively. For simplicity of the report, when saying that the Fed lowers the interest rate, it will imply that the Fed caused the interest rate to lower. Given the prior information, it can be seen that when the supply of money increases the economy's growth increases, and that is why lowering the interest rate is a good monetary policy. When financing capital good is less expensive, the company is able to buy more goods, expand, and get itself out of the recession. Therefore, the Fed must lower the interest rate in order to promote economic growth. This is because there is a lower amount of savings put in the banks and therefore leads to a lack of money for the banks to loan. In opposition to the Fed's future decision, is a distinct minority of economists.