The Federal Open Market Committee Essay

1916 Words Oct 8th, 2015 8 Pages
The Federal Open Market Committee (FOMC) utilizes the federal funds rate to affect change in our nation’s economy. By buying or selling securities, the FOMC can control how much money banks have available to loan to borrowers (Amadeo, n.d.). When banks are faced with decreased funds, they increase interest rates for borrowers to deter financing activities. One reason the FOMC changes the federal funds rate is to combat inflation or deflation within our economy. If the FOMC wishes to spur the economy, they will reduce the federal funds rate, making it easier for consumers to purchase items or fund new business projects. With an increase in demand, the price of goods and services will increase. The opposite is true for higher interest rates; with less money available to consumers and businesses (because they must spend more on interest payments for debt), their demand for products and services declines. This allows organizations to lower the price of their goods and services, reducing the amount of inflation within the market. (Amadeo, n.d.). The effects of an increased federal funds rate can be seen in multiple areas. Raising interest rates would have a decidedly negative impact on consumer financing of big-ticket items such as housing and automobiles. If the Federal Reserve increases interest rates, it becomes more expensive for banks to borrow money (Yaerd.org, n.d.). Banks will then pass on this increase to consumers in the form of higher interest rates, in order to…

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