Herein lies a basic introduction to the Federal Reserve, interest rates, and their effect upon the global economy.
To begin with, it is a common misconception that when a person secures a loan from the bank, they are walking away with a wealthy financier's hard-earned cash. Truth be told, this is hardly ever the case.
Instead, when a person obtains a loan for a car, a house, or anything in between, Uncle Sam essentially conjures the money out of thin air. It then gives this newly created wealth to the bank, and the bank in turn passes it along to the consumer.
This is where the interest rate comes into play. It is the expected pace at which the loan must be repaid. Some loans are fixed rate, meaning that the debt grows at a yearly annual rate regardless of what is happening in the overall market.
Other rates are known as adjustable, which means that the debt grows at a pace dependent upon certain market factors. These are far riskier, as they can at any point in time explode upwards, to the point where the person who has received the loan has no chance of ever paying it off.
So in summary, the government creates the money, gives it to the bank, and expects the bank to repay the loan. The bank in turn gives the money to the consumer, usually at a slightly higher interest rate so that they can virtually guarantee their cut of the resultant profits.
Now, as it turns out, manipulating the interest rate of the loan can have an enormous effect on a nation's economy. If the rate is absurdly high, such as 10%, no one will ever want to get such a high loan, and the entire system of credit grinds to a halt, along with the rest of the market.
If the rate is too low though, such as 1%, then everyone and their uncle will want to take out a loan, and trillions worth of currency is conjured up overnight, creating hyperinflation that exponentially erodes the average person's financial savings.
So in essence, the Fed's interest rate has to be optimized, based upon the prevailing market indicators at any one point in time. And as it turns out, finding that perfect rate has become more of an art than a science over the years.
As of this article, the Federal Reserve is slowly inching its pivotal interest rate upwards, in hopes of staving off further inflation. Their goal at this point in time is to bring financial relief to the American people without inadvertently triggering a significant contraction in the economy and igniting a resultant Recession. And in the end, their success will be determined by the accuracy of the metrics they are relying upon.
Thus concludes my explanation of the Federal Reserve, interest rates, and their impact on the overall economy.
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