The Federal Reserve is the central bank of the United States, one of the most complex institutions in the world. The Fed, as it is also called, determines how much it costs companies and consumers to borrow money.
The fact that there are cheap borrowing costs can help companies decide to hire new workers or make new investments. However, expensive fees can discourage businesses and consumers alike from making major purchases or spending.
What happens when the Fed raises rates
If the Federal Reserve imposes high interest rates this causes the costs of loans increase. This includes loans of everything from a car to credit card purchases.
This is because key lending rate benchmarks follow the movements of the Federal Reserve.
When interest rates are higher, the availability of money in the financial system also tends to decrease, another factor that makes borrowing more expensive. Sometimes, rates even go up on the mere expectation that the Fed will raise rates.
Why the Fed Raises Rates
If the Fed keeps interest rates too low it can boost demand for goods and services so much that supply couldn’t keep up, which is exactly what happened after the coronavirus pandemic. All of this can cause inflation to rise.
To curb inflation or price increases, the Federal Reserve raises interest rates. In this way, companies and consumers have less money available to spend, which causes fewer things to be bought and their price to fall due to less demand.
Although, as rates increase, it becomes more expensive to borrow money, it also has some aspects positives. And it can be beneficial for savings, since banks offer you better returns for keeping your money with them. They do this to continue having cash flow.
Of course, when rates drop, then yields also decrease, so savings are no longer so attractive.
You may also be interested in:
–Elon Musk tells the Fed it must cut rates immediately to avoid a severe recession