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As I understand it, the Fed would control the amount of inflation by setting the interest rates directly. Essentially, banks would be able to create money when
by bokonist 17y ago
As I understand it, the Fed would control the amount of inflation by setting the interest rates directly. Essentially, banks would be able to create money when they are able to find a lending opportunity that will pay a greater amount of interest than the federal funds rate. By raising or lowering the rate, the Fed can control the amount of inflation. This is at least my understanding of how it would work, I'm not an expert in banking, but you can follow sites like this one http://reservedplace.blogspot.com/2009/04/easing-understanding.html http://reservedplace.blogspot.com/2009/04/easing-understandi... or winterspeak.com to learn more.
- anamax 17y ago> As I understand it, the Fed would control the amount of inflation by setting the interest rates directly. Except that you can't control the amount of inflation by setting "the" interest rate. You can try to affect inflation with interest rates, but you can't control it. Inflation is too much currency chasing too few goods. Interest rates paid by banks aren't the only currency supply drivers. Velocity matters, and so does govt spending, among other things.
- bokonist 17y agoYour points are correct, the interest rates affect inflation rates, but do not fully control inflation rates. In my own opinion, interest rates are a terrible way to regulate inflation.