Business Report: Why does the Fed change interest rates? - Hawaii News Now - KGMB and KHNL

Business Report: Why does the Fed change interest rates?

HONOLULU (HawaiiNewsNow) -

It has literally been years since the Federal Reserve Board did anything to interest rates other than pushing them as low as they'll go. Today and tomorrow, the Fed's open market committee meets in Washington to discuss, and probably to approve, a quarter-point increase in interest rates. The Fed raises rates to prevent or control inflation in good times. In bad times it lower rates to stimulate the economy and prevent or control recession. It used to manage this by charging more or less for banks to borrow money from the Federal Reserve Banks. But regular banks hardly ever do that any more. So in recent years it's been driving rates down by buying Treasury notes in competition with everyone else. The more buyers, the lower the payback rate. Clever.

But this means the Fed holds a lot of this paper and will want to unload it one day. A hidden reason to stop buying more of it. Let's hope a rate hike or too doesn't choke off the recovery!

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