The Federal Reserve is the central bank of the United States and therefore is responsible for monetary policy. Monetary policy dictates the money supply which is available to an economy. During economic recessions, a central government may choose to increase the money supply and lower interest rates. However, during an economic boom, a central bank may decide to decrease the money supply and raise interest rates. The Fed accomplishes this task in several ways. It may increase the required reserve ratio for banks, which decreases the available money to lend and also decrease the money supply. Also, the Fed may increase the discount rate, which is the rate which it charges banks for short-term liquidity loans. The most effective tool however, is the open market operations. The Fed may choose to sell Treasury bonds in order to remove money from the economy and therefore increase interest rates since there is now a greater demand for the given amount of funds in the economy.
Open market operations ( purchasing bonds), Discount rates ( lowering the interest rates) and Reserve requirement.
In reality, the Fed does not lower interest rates. It lowers the rate charged to banks to borrow money. This usually results in a lowering of commercial rates.
When the Federal Reserve lowers interest rates, the value of outstanding bonds will increase. The increase in the value of bonds is due to the market price of the bonds adjusting to reflect the lower interest rates available on new bonds. Investors with bond holdings enjoy an increase in the value of their holdings when the Fed cuts rates. However, new investors in bonds will receive a lower rate of interest and if the Fed later raises rates, bond investors will experience a decrease in the market value of their bonds.
when money supply is increased, interest rates decrease
as interest rates increase, demand for money increases.
At this time, interest rates are not increasing. Due to economic constraints, the Federal Reserve has decided not to increase interest rates in the near term. http://money.cnn.com/news/specials/fed/
Open market operations ( purchasing bonds), Discount rates ( lowering the interest rates) and Reserve requirement.
In reality, the Fed does not lower interest rates. It lowers the rate charged to banks to borrow money. This usually results in a lowering of commercial rates.
When the Federal Reserve lowers interest rates, the value of outstanding bonds will increase. The increase in the value of bonds is due to the market price of the bonds adjusting to reflect the lower interest rates available on new bonds. Investors with bond holdings enjoy an increase in the value of their holdings when the Fed cuts rates. However, new investors in bonds will receive a lower rate of interest and if the Fed later raises rates, bond investors will experience a decrease in the market value of their bonds.
as interest rates increase, demand for money increases.
when money supply is increased, interest rates decrease
monetary policy
the fed
The Federal Reserve (The Fed)
An increase in interest rates decreases the aggregate demand shifting the curve to the left.
The Federal Reserve controls the interest rate at which federal banks lend money. This, in turn, has a cascading effect, in which other banks interest rates are determined based on the rate set by the Fed.
low in recessions and lets them increase in economic "boom" times