Federal Prime what now?

[asterroc]

There's this Federal Prime Interest Rate sorta thing. And the Feds change it. And somehow it makes all other interest rates change and whether people can get mortgages and stuff.

Explain.

Comments

[galbinus-caeli.livejournal.com]

Different sizes and types of banks. Investment banks and Commercial banks, and especially National banks (like the US Federal Reserve Bank)serve as bankers to the banks (and somewhat to large financial customers in some cases.

You or I cannot get an account with these guys, just the retail banks (like Bank of America or WAMU). When these banks ease up on their interest rates it allows the retail banks to keep more funds in circulation (and hold less in reserve)

Retail banks are required to keep enough money on hand to instantly pay out about ten percent of the money that savings account holders keep in their accounts(in aggregate).

So if they can borrow another $100 from an investment bank, they can issue another $1000 worth of loans.

[zandperl.livejournal.com]

Oh! That makes more sense now. Thanks! I didn't realize that there were different "levels" of banks like that.

[galbinus-caeli.livejournal.com]

I won't try to explain thrifts and finance companies.

[seekingferret.livejournal.com]

Yeah, what the Fed controls is the liquidity of the American money supply. The lower the interest rates, the easier it is to pump more money into the system, because banks can borrow from the Fed (and other similar lenders) more cheaply. This, in theory, fuels spending and accelerates the economy. Of course, as people above have discussed, the more money in the system, the less any individual dollar is worth- the Dreaded Inflation. So the Fed has to balance those two basic conflicting goals- minimizing inflation while keeping the economy expanding, along with a lot of other issues that play into the performance of the economy.

I find it funny that as we seem to be having a national referendum on the Greenspan era, with many economists coming out of the woodworks to condemn Greenspan's decision-making, the Bank of England is apparently coming under fire for not being Greenspan-ian enough. Or at least that's what I heard at 2am last night on the BBC World Report.

Personally my conviction is that the economy is too complicated a beast for anyone to accurately assess the economic implications of a given rate change, even after the fact. The Fed and its chairman have the sticky job of muddling along, trying to divine the right move from thin air- and all the while, their most important job is to exude faith in the American economy and their pretended control over it. Consumer confidence and investor confidence are two of the most crucial elements of the American economy and who has been better than Greenspan at boosting that confidence whenever it was necessary? After all, the catchphrase i most associate with Greenspan is "irrational exuberance".