...a lot of boats, but right now most boats are out in stormy seas. The Motely Fool has an interesting take on the whole thing:
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How the Fed Affects the Economy
Alan Greenspan and the Federal Reserve
By Chris Rugaber (TMF Chris)Every six weeks or so, traders on "The Street" eagerly anticipate the latest decision from Mount Olympus, otherwise known as the Federal Reserve. Will they cut interest rates, or raise them? By 50 basis points (0.5%), or 25 (0.25%)? Or will they do nothing?
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Ripple effects
Not only do open market operations affect the federal funds rate, but they also impact the amount of money circulating in the economy. If the Fed creates reserves to buy securities, this increases the amount of money available to banks to loan to consumers. For example, if a bank's reserves are increased by $100 million, it may loan $90 million of that to businesses and individuals, who will then deposit much of those loans in other banks, who will then be able to loan the funds again. This is another way that the Fed's open market operations can help boost economic growth. Of course, there is a reverse effect when the Fed sells securities and reduces the money supply as a result.
More importantly, interest rates influence each other, particularly for similar time periods. In other words, short-term rates are generally similar and affect each other, and the same is true for longer-term rates. Otherwise, market forces generally correct any outlying rate.
As a result, if the Fed increases the amount banks pay for their overnight reserve loans, then banks will follow suit by increasing rates on their short-term loans, essentially passing on the price of higher rates to the consumer. This also works its way into longer-term rates such as mortgage loans and corporate bonds, particularly if higher short-term rates are expected to continue.
It all takes time, of course, which is why most observers believe that any monetary policy changes by the Fed take at least six months to work their way through the economy.
The Fed's monetary policy tools are blunt instruments, and there are many other factors that affect the U. S. economy, such as the fiscal policies of the federal government. Investors may want to keep an eye on the Fed because of its influence on the economy, but the Fed is just one of many actors on the economic scene. As Warren Buffett stated in our intro, the quality of individual businesses should be foremost in the mind of individual investors.
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http://www.fool.com/Specials/2001/SpecialFed/AffectsEconomy.htm