Fed Interest Rate Decision

The interest rate, also known as the key rate, is the primary indicator of the cost of credit resources in the economy.

It is the rate at which commercial banks can borrow from each other or from the central bank. Typically, this refers to short-term, overnight loans.

The central bank rate directly affects all interest rates in the economy, including lending and deposit rates. By adjusting the rate, the central bank can shift monetary policy toward easing or tightening, depending on its objectives.

Changes in central bank policy, in turn, affect employment, gross domestic product (GDP), inflation, and many other macroeconomic indicators.

Therefore, if the financial regulator lowers the key rate, monetary policy is eased. Cheaper credit resources can help the economy recover from a recession by restoring business activity, reducing unemployment, and increasing GDP growth rates.

However, if price growth threatens the stability of the financial system, the central bank will tighten monetary policy. Raising interest rates makes credit less accessible, slowing economic growth, reducing business activity, and putting pressure on inflation.