| Of all the ways the Federal Reserve controls the | | | | money. They make money by loaning money to |
| money supply, the one that gets the most publicity | | | | borrowers. |
| concerns interest rate changes. | | | | Whenever the Fed increases the amount that the |
| Before scheduled Federal Reserve meetings, you'll | | | | commercial banks must pay to borrow money, the |
| hear a lot of speculation about what the Fed will do. | | | | banks cannot make as much profit on their loans to its |
| These speculations affect the stock market. Media | | | | customers. When the Fed decreases the amount, the |
| reports also speculate about the effect of these | | | | commercial banks can make more profit on their loans |
| possible changes on consumer credit cards, | | | | to bank customers. |
| mortgages, and auto loans. | | | | When the Fed changes the rates it charges banks, this |
| All of this media attention and speculation is a bit | | | | affects the speed of money in the economic system. |
| misleading, because any changes the Fed makes in | | | | The lower the interest cost, the faster banks can loan |
| the rates do not affect consumers directly. The | | | | out money and increase the amount of money in the |
| interest rate, also called the discount rate, does not | | | | system. The higher the cost, the slower banks can |
| refer to your credit card interest. It refers to the | | | | loan out money. So, even though the percentage |
| percentage the Federal Reserve banks charge | | | | directly affects banks, these rate changes matter to all |
| commercial banks when they borrow money. | | | | of us. |
| The Fed changes the percentage to make it more or | | | | The critical point is that consumer interest is not directly |
| less profitable for commercial banks to borrow money. | | | | related to changes in the Fed interest rate. The Fed |
| The banks use this borrowed money to make loans to | | | | does not change consumer percentages. The banks |
| their customers. | | | | might change your rates on credit cards or your |
| These are the essential points to keep in mind: | | | | adjustable rate mortgage, but the change is not directly |
| 1. The purpose of the Federal Reserve system is to | | | | tied to changes in the rate the Fed charges banks to |
| control the amount of money in the system. | | | | borrow money. |
| 2. The purpose of commercial banks is to make | | | | |