Monetary Policy

• The Federal Reserve primarily affects spending by raising and lowering the short-term interest rate at which banks borrow from each other overnight
• This lowers and raises net incentives to invest, and lowers and raises the value of the dollar
  • Thus business investment spending rises when the Federal Reserve cuts interest rates
  • And construction tends to rise when the Federal Reserve cuts interest rates
  • And next exports rise when the Federal Reserve cuts interest rates
• The hope is to keep total spending on a smooth growth track as the forces pushing for spending in different sectors rise and fall
• Sometimes the Fed succeeds; sometimes it fails
• It has been doing a lot better recently...