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this regulation by federal reserve, does it really regulate and level the economy composition in a fair and equal setting or it influence in predetermined way that benefit massively few class of individuals who are political correct at that time?? why do the fiscal and monetary policies usually increase cost of living for the common man with constant or higher unemployment, yet most financial intermediaries institutions thrive with high earnings respective of change in fiscal and monetary policy??
It;s a good question, and its all about the matters of SUPPLY and DEMAND, once the too much supply of money is lying in the bank. and they have not option than take it and let it move into the market in such cases, they have to drop the rates. some times, the countries like switzerland the cut the rate to negative factor.
It's very vita for the counties top banks to manage the rates locally and internationally as well. If there are imbalances it will create recessions just like subprime crisis by just touching to any one of the economic data points to bubble it. and rest is the history as we knew it.
Its vital to control the rates in order to measure the stability and economic growth of the country.
Dear Mohamed,
Depending on the demand for money (i.e investment activity), the central bank can influence interest rates through 'open market operations' which essentially involve the buying or selling of bonds. If interest rates are targeted to increase, the central bank would buy bonds from the government; therefore increasing the money supply causing the interest rate to increase as well.
Logically, when the money supply increases (meaning there is more money in the economy than there was before), the currency loses value. In order to offset this loss in currency value, prices will increase (inflation), and along with price inflation must come wage inflation.
With workers demanding higher wages in order to accommodate rising prices, institutions will not look to hire more workers and may even look to lay off some of the already employed, therefore increasing unemployment in the economy.
