Then US Federal Reserve Chairman Alan Greenspan goes and cuts the country's key interest rate by a half of a percentage point to 6 per cent. Most economists don't expect the Bank of Canada to follow Greenspan's lead this time, so I was half right. In any event, falling rates are still expected for North America and Europe throughout this year. Though we often see the impact on investments in the morning paper, this week we'll examine why and how interest rates impact investors. Fiscal policies deal with government spending while monetary policies involve the money supply and interest rates.
Interest rates are essentially the cost of acquiring or borrowing money.
If the economy is too sluggish, spending slows, job cuts accelerate, and the risk of recession sets in. An economy that is growing too rapidly is illustrated by consumer overconfidence, accelerated spending by consumers and businesses, excessive borrowing, which eventually results in high and rising inflation. Neither extreme makes for a healthy economy so keeping growth within a certain range is important. Background The Federal Funds Rate is the interest rate that the US government charges banks for short-term borrowing. The rate is changed by the Federal Reserve as a tool to influence the demand for money and, in turn, economic growth.