Inflation and Interest Rates

Posted By: Dr. Frugal in Saving on 09/22/2007 at 13:10:17

The primary weapon used in the fight on inflation is the core interest rates controlled by the Federal Reserve Board. A special committee of the Fed, as it's known, meets eight times a year to analyze economic data and act on interest rates. The Fed's actions have the effect of making it cheaper or more expensive to borrow money, which further stimulates or dampens the economy.

After the stock market's .com meltdown in 2000, the economy began a slide toward recession. September 11th put even more pressure on the markets and the economy. In an effort to prevent the economy from slipping into a recession, the Fed began slashing interest rates a quarter point at a time and didn't stop until the rates were down 1%.

The economy bottomed out and began to rebound. The rebound began moving faster than the Fed thought prudent, so it began raising interest rates to keep inflation from getting out of hand with the growing economy.

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