Inflation and Interest Rates

Whenever you hear the latest inflation update on the news, chances are that interest rates are mentioned in the same breath. In the United States, interest rates are decided by the Federal resave. The Fed meets eight times a year to set short-term interest rate targets. uring these meetings, the !"I and ""Is are significant factors in the Fed#s decision. Interest rates directly affect the credit mar$et %loans& because higher interest rates ma$e borrowing more costly. 'y changing interest rates, the Fed tries to achieve ma(imum employment, stable prices and a good level growth. )s interest rates drop, consumer spending increases and this in turn stimulates economic growth. %To learn how trade currencies using these economic reports, read Forex !ontrary to popular belief, e(cessive economic growth can in fact be very detrimental. )t one e(treme, an economy that is growing too fast can e(perience hyperinflation, resulting in the problems we mentioned earlier. )t the other e(treme, an economy with no inflation has essentially stagnated. The right level of economic growth, and thus inflation, is somewhere in the middle. It#s the Fed#s *ob to maintain that delicate balance. ) tightening, or rate increase, attempts to head off future inflation. )n easing, or rate decrease, aims to spur on economic growth. +eep in mind that while inflation is a ma*or issue, it is not the only factor informing the Fed#s decisions on interest rates. For e(ample, the Fed might ease interest rates during a financial crisis to provide li,uidity %fle(ibility to get out of investments& to U.S. financial mar$ets, thus preventing a mar$et meltdown.