Can the Fed Control Interest Rates?
The
It lowered its "target range" for something known as "the federal funds rate" by one half of one percent to 4.75-5.00 percent, its first cut in the target range in four years. Should you be happy or sad?
The answer is, neither. It would be hard to imagine anything more irrelevant or disconnected from the rest of the economy than changes in the federal funds target range.
There are countless economic myths but perhaps the most puzzling of them all is that the
When the
The discount rate is essentially irrelevant now. Very few banks borrow money from the Fed and all banks are, in fact, discouraged from doing so.
The interest rate you now hear about is the federal funds rate.
What, you might ask, are federal funds? They are overnight loans among banks of their excess reserves. That's about the shortest-term loan you'll ever see. The direct impacts are all within the banking system -- what is a cost for one bank is revenue for another.
So, if the Fed doesn't control interest rates, what does? An interest rate is a price, and like all other prices in a free-market economy, it is the result of the interactions between supply and demand, which in turn are affected by factors too numerous to count, measure, or comprehend.
The supposedly significant change in an obscure federal funds target range will have minimal effect on mortgage rates, credit card rates, or auto loans, so don't get your hopes up.
The growth rate of the nation's money supply since 2020 has increased dramatically, mostly because of large government deficits accommodated by the Fed.
The best example of that is the massive, grossly mislabeled "Inflation Reduction Act" (IRA) passed by the Biden administration 2022. It is described by the
An earlier, similar example was the 2021 "American Rescue Plan." It was another mislabeled Democrat vote-buying scheme.
Expanding the money supply is the coward's way to finance deficits and the result is inflation, i.e. "too much money chasing too few goods."
Soon that inflation gets factored into interest rates by way of "inflationary expectations." Lenders demand and get higher interest rates because they know the dollars they'll be repaid will be worth less than the ones they lent. Borrowers are aware of that as well.
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