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January 07, 2008

The Fed and interest rates

The Federal Reserve's actions are often confusing. The Fed has substantial influence over interest rates, but it seems like one year they push rates down, then another they go up, then it's back down again. What's up - an down - with the Fed's interest rate policy? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, you're not alone, I think, with being confused sometimes with government policy in general, but, in particular, the Federal Reserve. I think the way to explain this is that the interest rate policy that the Federal Reserve follows is sort of like your gas pedal in your car.

"When the Fed thinks the economy needs a little more gas, they are going to push interest rates down. And when they feel like the economy perhaps is going too fast and may veer off the road, they will pull interest rates back and push them up.

"And so, for example, if we go back to the period of 2001 to 2003, the Fed was pushing interest rates down because we had, among other things, a recession earlier in that period. Then we got faster growth in 2004 to 2006, so the Fed was pushing interest rates back up. And now, with the economy being slower again, the Fed has gone the other way, and they are pushing interest rates down.

"So there is a constant balancing act here that the Fed follows. And their policy is not without criticism. There are some very imminent economist over time who have said that this kind of back and forth in Federal Reserve interest rate policy may actually contribute to more economic booms and busts than it solves, and they would rather see the Federal Reserve have a much more stable interest rate policy."

Posted by Dave at January 7, 2008 08:00 AM