Question

The Federal Reserve has recently started to adjust interest rates higher after maintaining lower rates in response to the 2008 recession. What is the economic significance of this change? What will the impact be on the business environment?

Answer 1

Federal fund rate is the rate at which a depository institution, mainly a commercial bank lends funds maintained at the Fed to another bank overnight. It is one of the most influential interest rates in the U.S. economy. It affects monetary conditions directly or indirectly. It also act as a benchmark inorder to compare it with other interest rates.

The Fed decreases its interest rates in order to stimulate economic growth.The lower the financing costs will encourage borrowing and investing. When there is too much growth, then they raise interest rates in order to slow inflation and return growth to more sustainable levels.

When interest rates rise, it is advantageous for banking sector profits since they can earn more money on the dollars amounts of interest received on loans. But for the rest of the global business sector, a rise in interest rates carves into profitability. That’s because the cost of capital( ie interest )required to expand increases. That could be terrible news for a market that is currently facing an earnings recession. Lowering interest rates should be an advantage to many business profits as they can obtain capital with cheaper financing and make investments in their operations for lower cost.