Federal Reserve and the Economy

Paper Summary:

The American economy has many components that contribute to its growth and affect its rate of inflation. The overriding stimuli stem from the monetary and fiscal controls imposed by the Federal Reserve and government, respectively. This paper explains how economy has enjoyed modest growth for several years and that can be expected to continue. It discusses why the Federal Reserve is raised interest rates in late 1999 in order to keep the rate of inflation down and discusses the reasons for this act.

From the Paper:

"The Federal Reserve sets interest rates by mandating the rates at which Federal Reserve banks loan funds to other institutions. These rates then affect the rates of those institutions as they seek to maintain their profit. Thus an increase in rates by the Federal Reserve results in an increase in interest rates charged to customers by financial institutions throughout the nation. Investors may, in this instance, move some funds out of other investments in order to take advantage of the higher rates (such as moving out of bonds), and the stock market may see a decrease in value as investors weigh the effect of the interest rate increase on corporate borrowing."

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