Interest Rates and the Weather

American Monetary AssociationWhile it might sometimes seem to be to the contrary, interest rates are not pinned to the back of a passing storm front, left free to wander hither and yon, directed not by the hand of man or beast. Actually there is an alleged plan behind what sometimes seems to be the infinitesimal and random adjustment of the prevailing percentage. Furthermore, there is an actual entity that controls this aspect of the economy, we’re not sure if it’s man of beast, called the Federal Reserve.

Why does the Fed keep messing with interest rates? Their stated goal is to keep the country at full employment, randomly defined as around 4–5 %, and inflation low. Though AMA readers know that the reason they want our economy to stay strong is as far from altruism as is possible to get, on the surface both are admirable goals. The problem for the Fed is that keeping the American economy on even keel is like juggling water. It tends to wander this way or that, never staying long in one spot. The tool they use to accomplish this balancing act is a repeated adjustment of interest rates.

How does this help? The theory is that lowering the Discount Rate (cost for banks to borrow overnight from the Fed) lowers the cost of lending, which makes the average American more eager to take out a loan and start a business or build a house or purchase a car – anything to start money circulating through the economy. The issue is that the economy can overheat if the rate goes low and stays there for a protracted length of time; that’s when the brain trust at the Federal Reserve will start adjusting interest rates back up. Artificially low rates creates the effect of too much money and too few goods. Demand outraces supply and prices go up. Allow the interest rates to get too high, however, and you risk a recession, where the opposite applies. In a recession, supply exceeds demand and nobody’s in a buying mood.

People often make the mistaken assumption that the Fed is a government agency making decisions based on the current administration’s policy goals. While the president does appoint the Federal Reserve Chairman, make no mistake that the Fed is a private entity and, no matter its statement of public intentions, its first and foremost task is to make money and lots of it for its international handlers.

Feel used yet?

The American Monetary Association Team

American Monetary Association

Flickr / tombothetominator

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