Why do you think the fedreal government adjust (raises or lowers) the prime interest rate?

Question

What do you think are some of the effects of the adjustments? why do yu think bankers, investors, lenders and cosumers closely follow of a change in the prime rate?

Answer 1

Because any adjustment is an indicator of both policy and the economy's current health.
The money supply, the amount people save and the amount of foreign investment are all dependent on the base rate.
Attempts to control inflation, encourage consumer spending, prevent economic over-heating, prevent forced revaluation of currencies all manifest themselves in interest rate adjustments which also indicate overall financial and fiscal policy, which everyone likes to try and predict!

Answer 2

The federal government does not control interest rates, the Federal Reserve Bank does, but only short-term rates, called the Fed Funds and Discount rate. The Fed Funds rate is the rate banks charge each other for overnight lending, and the DIscount rate is what the Fed charges banks.

Interest rates are just the price of money. By raising and lowering money's price, you can change the supply. When the Fed sees business and consumer activity is too slow, they cut the rate (cost of money), thereby adding supply. They do the opposite when they see too much debt and silly investments.

The Fed does have a mechanism to influence long term rates; they can buy or sell Treasury bonds. However, I can't think of any time in recent history they have done this other than to balance their own portfolio. That means they haven't deliberately signalled to the market long-term rates are too high or too low.

Answer 3

When you raise the price of something, it usually reduces the demand for it. And vice-versa.

The Federal Reserve can change a few interest rates: the federal funds rate, and the discount rate. The prime rate is what banks charge their 'best' customers - the Fed doesn't have direct control over the prime rate.

The federal funds rate and discount rates are very short term rates that the Fed applies to money it lends to its member banks. If the cost of money is increased to member banks, they usually pass the cost along to their customers, so the prime rate usually changes whenever the federal funds rate changes.

Bankers and other lenders follow the Fed's actions because they need to adjust the interest rates they charge to their customers.

Investors follow the Fed's rate changes because they it changes the long-term returns on their investments, and it has a ripple effect on business and consumer spending activities.

Consumers watch the Fed because they make decisons about how much additional interest expenses they will pay when buying a house or car, or credit card interest expenses or other forms of borrowing.

Answer 4

the federal funds rate, and the discount rate. The prime rate is what banks charge their 'best' customers - the Fed doesn't have direct control over the prime rate.

The federal funds rate and discount rates are very short term rates that the Fed applies to money it lends to its member banks. If the cost of money is increased to member banks, they usually pass the cost along to their customers, so the prime rate usually changes whenever the federal funds rate changes.

Bankers and other lenders follow the Fed's actions because they need to adjust the interest rates they charge to their customers.

Answer 5

The reason the rates are adjusted is to control the amount of money flowing within the economy. If the fed increases interest rates, less people will borrow money, thus moving money out of the free market. If there's less money in the market, then people buy less, thus forcing down prices (supply/demand theory). If the rates go down, more money flows into the economy through increased debt spending. If there's more money than supply, it can force prices up to meet increased demand.

Here you thought economists were boring!

Answer 6

The theory is that higher rates will slow growth, lower rates will speed it back up. Business does follow the changes, but there are world wide trends and issues involving the US debt that keep this from working as intended all the time.

Answer 7

I think its based on the Gross National Product (GNP) which effects earning, therefore spending, etc. Banks will quote an interest rate at "x points above prime.

Answer 8

The Chairman of the Federal Reserve changes it based on the outcome of horse races.

Answer 9

exciting? Oh heck yeah! 10 out of 10! Informative? Bahahahahahahahahahahahahahahahahahahaha... i'm think to hearken to suggestion given right here????????????? or believe as reality, human beings posting rubbish from countless knucklehead web pages? do no longer make me chortle. ! yet exciting as all get out!

Answer 10

some long theoy of economics goes into it
which you and i dont know and will never be able to understand