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February 13, 2012 9:54 pm Published by Leave your thoughts

Before you understand how a change in federal reserve interest rate affects your business you should first know what the Federal Reserve is trying to do.

The goals of Fed monetary policy are (1) support sustainable growth in the U.S. economy, (2) support high employment and (3) keep prices stable. The Fed accomplishes these goals through managing the amount of money in circulation and in accounts at commercial banks. One of the Fed’s tools for managing money is to change interest rates. High interest rates make money more expensive and contract the amount of money in circulation and in banks. Low rates make money less expensive and increase the money supply.

Interest rates affect everything in the business world, including the amount of money you must pay on your loans and the ease of obtaining those loans, credit card rates and even the stock market. This is because high interest rates reduce corporate earnings by slowing business and making it more expensive to do business, so the price of a company’s stock will very likely decline as its earnings declines.

When interest rates rise, you are paying more to do business, and so are your competitors and suppliers. As high interest rates take money and credit away from your customers, a price war in your industry to attract more business may arise. This is also the time when companies that have money begin to acquire other companies that are suffering as the recession starts. In addition, high interest rates will lower the price of your home and other assets because they will be more difficult to sell.

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