The Fed lowers the rate it charges its member banks for overnight loans, which then permits banks themselves to lower rates for borrowers. If banks find takers for the money, the effect is to create credit that is unjustified by the pool of savings. Assuming no other changes, this new money waters down the purchasing power of all existing money. The banks and their connected interests are able to spend the money before prices rise, while the consuming public gets stuck with the bill down the line. The effects of inflation are deadly for long-term growth.
Inflationary expectations can quickly take hold.
Instead of saving, then, consumers began to realize that they are far better off spending, that is, getting rid of their cash before its purchasing power decreases. These spending patterns further increase prices until a spiraling upward begins to take effect. It can either slam on the brakes and prompt a dramatic economic downturn, or it can guide us into a hyper-inflationary environment. It turns out, however, that inflation is the last thing anyone cares about right now. Saving America s mutual funds from further calamity is apparently more important than forestalling wholesale robbery via inflation of what is left of American savings.