This phenomenon can cause an economic slowdown and stagnate business growth. Decreasing interest rates can discourage deflation in the market because it increases the cost of goods and services. According to Market Watch's website, deflation can be the harbinger of an economic depression and may reduce the Fed's ability to stimulate the economy through monetary policy if deflation is not fought aggressively.
An excitement percentage exaggeration in the housing mart normally coincides with an elaboration in the creation of virgin territory loans. Morgage lenders up thrust rates to proceeds assistance of an inflow of nation wanting to invest in homes and besides to clout call for. Higher curiosity rates donkeywork to nipping entail for family loans, which prevents the prices of existing homes from inflating above licence marketplace market price. Whether interest rates climb too high, it can cause a slow down in the housing market, as buyers are effectively "priced out" of home loans.
Limiting Consumer Spending
The Federal Reserve may adjust the Prime Rate to either encourage or discourage consumer spending. The Prime Rate is the foundation interest rate for short-term loans created in the USA. Almost all loan interest rates are determined in the short-term using the Prime Rate. A higher Prime Rate works to reduce consumer spending and encourage savings, because securing credit is more costly. The Fed may employ this tactic as a means of fighting hyperinflation. This occurs when the economy grows too rapidly, resulting in an imbalance in supply and demand.
Effects on Inflation
Inflation is a steady rise in the price of goods and services without an increase in the value or supply of currency. As a result, an increasing amount of money is needed to purchase the same amount of goods. Higher interest rates can work to fight inflation by making it more expensive to borrow money and slowing the growth of prices in the market. This allows the value or supply of currency to catch up to remainder of the market.
Discouraging Deflation
Deflation can be as bad as inflation for economic growth. Deflation occurs when the cost of goods and services decreases while the supply of money in the economy remains the same or increases.The Federal Reserve (Fed) provides the leading access regarding the engrossment rates used by banks and other financial institutions across the sovereign state. The Fed attempts to accomplish a Dainty equilibrium between discouraging economic conditions, including inflation and deflation, and encouraging economic activity. The Fed may exercise carefulness percentage changes as a device to either stimulate the economy or slow down economic buildup.
