Debra Lins CEO consulting.
Lins Business Consulting.
. Lins Business Consulting LLC.
608.963.2673
deb@linsbusinessconsulting.com

Lins Business Consulting.
Debra Lins.
Debra Lins.
ceo consultant. small business consultant.
FDIC compliance.
bank consulting.
Debra Lins, MBA.

Debra R. Lins, MBA


Lins Business Consulting.
Lins Business Consulting LLC   -   White Paper

<-- Back




How Does the Fed Set Rates

Many times there is a lack of understanding or awareness as to how the Federal Reserve System (Fed) "sets" interest rates. It is important to note, the same principles apply to a bank's rates for both deposits and loans. Perhaps this quick overview will assist in explaining interest rate changes.

Let's start with the Fed. The Federal Reserve does not actually "set" or "change" interest rates; they only alter the conditions in the market that influence interest rates. The reasons for pursuing to change interest rates are for the purpose of exerting control on the overall economy. Generally, lower rates are desirable to spur economic activity; whereas higher rates are employed to cool off (slow down) the economy and to control inflation.

Interest rates are largely influenced by the law of supply and demand - when the supply of money to lend exceeds the demand for loans, the price of a loan (reflected in the interest rate) declines. The reverse is also true - when the demand for loans exceeds the supply of lendable funds, the price (reflected in the interest rate) goes up. The Fed influences those dynamics by buying or selling U.S. Treasury Securities, which can raise or lower the supply of money in the private sector. For instance, when the Federal Reserve wants higher rates in order to control inflationary factors it will sell securities, this in turn reduces the amount of "money" in circulation. "Money" is defined as predominantly currency and demand deposits in all banks.

Financial institutions do not directly influence overall rate changes. These institutions instead react to a rate change. Correspondingly, as the supply of money decreases banks and credit unions may raise the rates paid on customers' deposits to attract new deposits and to retain existing dollars already on deposit. Similarly, a financial institution raises the rates charged for loans in order to meet the added cost on deposits. How fast a financial institution responds in making changes to their rates depends on the underlying supply and demand factor discussed, and how fast their competition changes interest rates.

I hope you have found this high level summation of how the Federal Reserve influences interest rates of merit.

<-- Back




business consulting.
management consulting. Connect with Debra Lins on Linkedin.
                © 2013 Lins Business Consulting All rights reserved - Prairie du Sac , Wisconsin                                                                                                 Contact
business consulting.


Tag words: Lins Business Consulting, Debra Lins, testimonials, derrick van mell, van mell associates, tim lins, eagle valley ag services, jd byrider.