Did you know that seven out of ten Americans find it hard to understand the Federal Reserve’s interest rate policies? If you’re like most of America, then you have a vague idea of how the Federal Reserve works.
But, when it comes to the practical ways that it influences the economy, you might be lost.
That’s why we made this article on the Federal Reserve can influence the supply of money. That way, you can stay informed on how this important tool regulates the economy. Let’s get started!
What Is the Federal Reserve?
When the Federal Reserve was first started in 1913, its goal wasn’t to level out the economy through stabilization policies.
Instead, the founders wanted the Federal Reserve to make sure that during tight economic times all the money and credit didn’t dry up completely.
However, these days the role of these central banks has expanded. Now, it’s used as a last resort bank that other banks can borrow from in emergencies. In addition to this, it also manages the growth of the economy.
It does this using three tools: by setting strict bank reserve criteria, setting the discount rate, and through open market operations.
How the Federal Reserve Can Influence the Supply of Money
The main way that the Federal Reserve influences us is through the buying and selling of bonds.
They do this in an attempt to influence the interest rates we receive for loans. What types of interest rates does it affect? Here are some of the main ones:
- Mortgage interest rates
- Auto loan interest rates
- Home equity line of credit
- Credit card interest rates
If you want to learn more about how the Federal Reserve influences these types of interest rates, then make sure to read this full article on manausa.com.
How Does It Influence the Economy Indirectly?
One way the Federal Reserve System can indirectly influence the economy is by increasing the money supply. They’ll often do this in a recession to help spur lending.
But, it can also cause many businesses to raise their prices, which in turn causes inflation. When this happens, the Federal Reserve might restrict the money supply.
That way, spending becomes tightened and businesses lower their prices. This push and pull with the money supply can also influence the job market. Certain ideal interest rates may encourage employers to hire more people.
Appreciate Learning About the Federal Reserve? Keep Reading
As you can see, this Federal Reserve isn’t just some abstract concept.
It’s a very real tool that can dramatically influence the rates you receive on a loan. Because of this, it’s important to stay up-to-date on the actions of the Federal Reserve, especially if you plan on borrowing money soon.
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