Why is the Federal interest rate so important to the national economy?
The Fed Funds rate, which is what you are reffering to is the rate at which banks lend money to each other over night in order to ballance their reserve requirments. The Federal Reserve “targets” this rate at a certain level. This is what is happening when you hear that interest rates have been cut or raised. It targets these by increasing and decresing the money supply in circulation. When it wants to lower the rate, it buys government bonds with printed money, increasing the supply of money and thus lowering the “price” of money known as an the interest rate. So why is this important? Well, when banks can borrow money more cheaply, they are able to lend more money cheaply. By having this increased “liquidity” in the system, business development and home building can accelerate due to the increased supply of loanable funds at lower prices. This in turn creates jobs and higher wages. So the Fed Resreve can stimulate economic growth by increasing the money supply via interest rate targe
