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the causes are not the same and the Federal Reserve Bank may not achieve the desired results by increasing interest rates,

What does it mean? What interest rates can Federal Reserve change?


1 Answer 1


Directly Fed can change the interest rates it charges for loans to other banks. However, indirectly it can change all interest rates in the economy.

Most banks need to borrow reserves from Fed to fund the lending they make. You can think of the Fed’s interest rate as cost of money for private banks.

In turn the price regular people pay for loans will depend on the cost that private banks pay for their money. Furthermore, any other debt instrument, bonds, treasury bill, whatever you can think of competes with debt that people can get from banks. Ceteris paribus firm would not issue bond with a higher coupon rate (i.e. higher interest) than the interest on a loan it can get from a bank (of course in real life you will see differences because all factors are not equal).

Hence indirectly Fed can influence all interest rates in the economy. However, it cannot set them directly like its interest rate.


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