How does the fed increase and decrese the interest rate?

Answer 1

If they want to increase the interest rate, the Fed SELLS bonds on the open market. This means that cash comes OFF the market; which means there is less money in circulation and banks charge more to lend.

To lower the interest rate; they buy bonds and inject more cash into circulation.

Answer 2

Which interest rate?

The interest rate that banks chage other banks is set by the Chariman (Berneke) and this is the short term rate (1-3 nights). I'm going to take a long shot, and assume you don't want to know about M1 (Cash, & Bank Deposts),but you'd rather know how M2 & M3 (Savings, Mutual Fund $ Mkts + Large time deposits)

The long term interst rate is determined largly on supply and demand. These are the mortgages, bussiness debt, and anyother debt greater than a year. As controls of the money supply (M!, M2, & M3) the Federal Open Market Committee (FOMC) does work withing "Monetary Obejectives". Here is how the Fed has operated in the past:

1. Before 1979, the Fed favored the federal funds rate as its main operating target.
2. However, the seventies were marked by double-digit inflation. In an effort to gain better control over the money supply and thereby tame inflation, the Fed switched its operating target from federal funds rate to the reserve aggregates. Reserve aggregates were the dominant operating target from 1979 till 1982.
3. By mid 1982, double-digit inflation had been replaced by double-digit unemployment as the major economic problem in the courntry. The Fed reacted by trying to lower interest rates in an effort to stimulate more borrowing and spending. It thus started to pay attention again to the federal funds rate as an operating target. The Fed still pays consideralby lip-service to the reserve aggregates.

Answer 3

Another thing they do is adjust the reserve ratio. The reserve ratio is the percentage of deposits that commercial banks must maintain as ready cash.

For instance, if the reserve ratio is 10%, then a bank is allowed to lend 90% of its deposits. If the fed reduces the ratio by a percentage or two, then the banks can lend more money; more money [generally] leads to a lower interest rate.

Answer 4

By buying and selling US bonds