Can someone help me unpack the quoted statement below?
- Trying to understand how the supply of credit influences the fed raising rates. I guess, why do rates rise or fall in conjunction if the fed raises or lowers rates? If the fed raises rates, does a bank have to raise them as well?
- I'm assuming the fed raises rates to stop the market from getting to hot if banks are creating credit to quickly; I just don't see how fed hikes stop this trend. Thank you! (Please understand my limited knowledge on the subject)
"The amount of money in the economy is determined less by the need to buy ‘stuff’ and more by the supply of credit created by private sector banks responding to the demand from borrowers. In normal times, changes in the supply of credit will be driven by changes in the demand from borrowers to which banks react, and in turn those developments will reflect the influence of the interest rate set by the central bank." - The End of Alchemy