Tags: Money | Federal Reserve | interest rates

How Does the Fed Affect Interest Rates?

By    |   Saturday, 20 June 2015 11:28 PM

Interest rates are set by the Federal Open Market Committee, a body of seven Federal Reserve Board governors as well as five presidents of Federal Reserve Banks, which meets eight times each year, according to Investopedia.

Such meetings are secret, leading to much speculation by Wall Street analysts. They are used to determine whether the federal money supply should be increased or decreased and to set what is called a discount rate. Such tightening or loosening of money supplies affect the rise and fall of interest rates, Investopedia noted.

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Interest rates are controlled by the Fed through government-backed securities that are bought and sold, according to HowStuffWorks.com. Changes in such rates can help to stimulate the economy or fight off periods of economic inflation.

If rates are too low, inflation can occur. Increases in interest rates can serve to strengthen the dollar, attracting outside investors and increasing demand and buying power around the world. The balance can be tricky; if rates soar too high too fast, recession can occur, according to the website About Money.

The website notes that the Federal Reserve can affect interest rates in two ways: raising or lowering the discount rate (what banks charge in interest when borrowing from other Federal Reserve Banks); and indirectly, by using its influence on the direction of the federal funds rate, which is what banks charge one another for overnight loans.

These costs get passed along to consumers in what is called the prime lending rate. According to the Federal Reserve website, prime interest is determined by a reporting of the nation's largest top banks — the base rate they charge for different types of loans, which gets reported by the Federal Reserve Board.

While the fed has "no direct role in setting the prime rate, many banks choose to set their prime rates based partly on the target level of the federal funds rate — the rate that banks charge each other for short-term loans--established by the Federal Open Market Committee," FederalReserve.gov said.

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Interest rates are set by the Federal Open Market Committee, a body of seven Federal Reserve Board governors as well as five presidents of Federal Reserve Banks, which meets eight times each year, according to Investopedia.
Federal Reserve, interest rates
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2015-28-20
Saturday, 20 June 2015 11:28 PM
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