Does increase/decrease Federal Funds Rate affect unemployment?

Answer 1

Not directly, but it does have an impact indirectly. The Fed raises interest rates to slow the economy to control inflation. If things are moving to fast prices start to inflate and things get crazy. The Feds lower the interest rate to jump start the economy when things are slow. Here's how it effects jobs. If the Fed chooses to slow the economy by raising rates it makes money more expensive to borrow. If interest rates are high, I'm not going to buy a new house or a new car, i will only make purchases that I don't have to borrow large amounts of money. If I don't by a house, the men and women that build them and supply the raw materials have one less thing to do that day. Some of them may fear for there job, loose their over time, or get laid off. In turn they won't be spending any new money either, so the things they are not NOT buying may effect my job because I may be in trucking. If the above duplicates over and over there is less freight to carry, and my boss may lay me off. That will happen until the Fed wants to spark the economy, then the will lower interest rates and the whole thing happens again just in reverse.

Tom

Answer 2

tsbr1963 an Thomas O basically have it correct.

But the effect of the Fed Funds Rate on unemployment is as direct as it is on inflation. This point is actually written into federal law.

The current legal mandate from Congress to the Fed, states two things. 1) Maintain a low or zero monetary inflation rate. 2) Maintain a low unemployment rate (sometimes called a "full" employment rate & is considered to be 4.5% to 5% unemployment). These are almost contradictory tasks & require the Fed to try to create a "Goldilocks" economy; an economy that is neither too hot nor too cold.

Answer 3

I don't see why it would, the fed funds rate is just the rate that banks charge each other for lending federal funds to each other. It shouldn't have anything to do with unemployment.

Answer 4

Sort of...it sort of affects unemployment.
Fed funds rate affects the cost of money. When money is expensive or taxes high, businesses expand less...and when they expand less, they hire less...and when they hire less, then unemployment remains high. It is indirect, but yes, it does have an affect.

Answer 5

fed money value is a ballpark of the "threat loose" value. All bonds have some correlation to the "threat-loose" value. hence ordinarily is a good correlation between fed money value and bond yields.