How the Fed sets Interest Rates

Economics in Action

You might have heard business news reports of the Fed raising or lowering interest rates to slow down or speed up the economy, but how does the Fed actually do this? Why do interest rates matter? What interest rate does the Fed even control? In this episode, we'll take a look at arguably the most important institution in the world and how it uses its most important tool, interest rates, to influence the overall economy. Most textbooks out there are outdated in how their description of how the Fed sets the interest rate and today we're going to set the record straight about the Fed's new way of setting rates, known as the floor system. So strap in, because we're about to get banky.

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