CPA Scott Adair discussed the Federal Reserve and the impact it has on interest rates Monday during News 8 at Sunrise.

“The Federal Reserve is the central back of the United States,” Adair explained. “Effectively, it’s comprised of a Board of Governors and twelve regional independent banks. When I say independent, I mean independent from the U.S. government, but also attached to our enabled body, from that perspective.”

The primary function of the Federal Reserve is setting or establishing interest rates that we are all impacted by when we borrow money. “They buy and sell federally-backed securities,” said Adair. “By purchasing those securities, they are effectively pumping cash into the economy to lower or control interest rates. When they go to sell federal-backed securities, they are effectively increasing the interest rate because they’re taking cash from the banks.”

Adair said when the Fed buys or sells these securities it is effectively changing is the interest rate that the banks charge one another for short-term notes. “Indirectly, they control the interest rate that you and I borrow money from. If the banks are impacted by the interest rate that they’re loaning money to one another from, they’re going to raise the interest rate or lower the interest rate that they’re charging us when we go to borrow money from them.”

The motivation for changing interest rates all depends on the economy noted Adair. The Fed is either looking to spur the economy or control inflation. “Effectively, what they would look to do is raise interest rates, if they need to slow down the growth in the economy, or lower interests to effectively spur people to invest more money into the economy or purchase goods.”
Adair compared interest rates for a home mortgage to provide an example of how this could effect consumers. You can borrow $100,000 from the bank at eight percent, or $135,000 from the same bank at five percent. The lower interest rate significantly improves your purchasing power, with an increase of $35,000 related to a three percent chance in the interest rate.
One might ask why the Fed wouldn’t keep rates low all the time. Adair said, “The theory is that you need to control the economy, but there’s time where you want to spur growth and there’s time where you want to control inflation. The Fed is monitoring that on a constant basis to make sure that the economy kind of stays flat. That’s the theory of it. It doesn’t always happen that way in practice.”
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