The banking structure in this country is actually very complex and it will take most people a little time to digest everything. Having said that, though, I can provide you with some very basic information about who sets and controls interest rates. The Federal Reserve, or the Fed, is an independent organization that doesn’t need the approval of the president or Congress to enact it’s policies. I suspect most people didn’t know that… I sure didn’t. The Fed’s mandate is to create a stable economy with high employment, minimal inflation and low interest rates. Basically to ensure that the economy keeps rolling along with as few bumps in the road as possible. They have several tools to help them accomplish that goal. One of the most important of these tools is the ability that it controls interest rates.
Setting the interest rate is a very important in keeping the economy on a smooth course. The interest rates will directly influence how much money is put into circulation. The general rule of thumb is that if you have too much currency in circulation it can lead to inflation but too little currency in circulation can lead to a sluggish economy. The Fed has the responsibility to try to maintain the perfect balance at all times so the economy can grow but inflation doesn’t get out of control. The Fed uses their economic analysis as the basis for determining what actions they need to take. This comes directly form their Washington D.C. headquarters as well as being compiled from district banks around the country. These banks are located in large cities from coast to coast.
Each of these banks will collect regional economic information and create a profile. That regional information will be compiled into a comprehensive report that helps the Fed get a complete economic picture of the entire country. Based on the report the Federal Open Market Committee, a twelve member board which is an arm of the Fed, will meet to determine what changes in policy need to be enacted. They generally meet every 6 weeks. When the FOMC decides that either more or less currency needs to be in circulation, they will either issue a buy or sell order for U.S. treasuries. When the FOMC issues a buy order it will result in an increase in the amount of currency in circulation.
More currency in circulation means easier borrowing and lower interest rates. If they issue a sell order, there will be less currency in circulation, and that will translate into higher interest rates – less borrowing and can help reduce inflation. As I stated above, this is a complex issue and it may take you a little more time and information to fully digest it all. It is important for you to have as deep of an understanding as possible of the way our economy works. I know, we are all busy and this information can be confusing, but knowing how it works will allow you the best chance at making smart financial decisions for you and your family. And now, at least, you have some basics on the inner workings of our economy and insight into who controls interest rates.
Howard Martell is the Owner of http://HomeProfitCoach.com/superstar . Check us out anytime for marketing tips and a free subscription to our cutting edge newsletter.