The Federal Reserve’s Macroeconomic Tool
A study of federal funds rates and their impact on the economy.
This paper answers the following questions: How does the movement of interest rates impact the economy? How do interest rates impact inflation, foreign exchange rates, stock markets, bond markets and corporate growth? What role does the Federal Reserve play in the ecomy and how can changing the interest rates improve or hurt the economy? What rates does the Federal Reserve set?
1.1] Introduction Interest rates are an important macroeconomic tool, used by the Federal Reserve Board to exercise monetary policy decisions. Although there is a widespread debate on how such a policy should be complimented with fiscal policies which are used by the government there is a large consensus that it does help to prevent excessive overheating of the economy and also help prevent long term recessions. Fiscal policy on the other hand may not offer a similar support mechanism to markets and its effects on the economy may take place over several years.