March 3, 2009
Why do people say a Fed interest rate cut is printing money?
Can you answer punstress's question about printing?:
When the Fed cuts its rate, people say it is printing money. I realize printing money is a metaphor for increasing the money supply, but why does cutting the interest rate increase the money supply? And how do they figure out exactly how much? Like, they'll say, the fed injected 41 billion dollars (whatever) into the money supply, something like that, but they'll relate that to the interest rate cut.
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Comments on Why do people say a Fed interest rate cut is printing money? »
Cause the more money the Fed Reserve prints out, means more inflation.
There are four ways that the money supply is affected:
1. Interest rates that make certain business projects feasible. The lower the rate the more business projects can be financed and make a profit.
2. The velocity of money. The money supply has a speed to it being used over and over again. The faster the speed the faster the velocity. Lower interest rates create a demand for money through borrowing for business projects.
3. Banks are required to hold back some of their assets instead of loaning them out. The lower the rate the more money they can loan out - to meet the demand of borrowing - caused by lower interest rates.
4. When National Banks of various countries lower their interest rates they devalue their money - which makes it cheaper for other countries to buy our goods rather than from other countries with a higher interest rate. It also makes those countries that loaned us money take a loss.
Homer J Simpson nailed your answer