Fed Rate Hike Policy

US Federal Reserve has a dual mandate to promote maximum Employment and Stable Prices.

Fed will lower rates when it wants to spur economic activity, for example, stimulate consumer consumption as lowered interest rates will allow people to borrow more to buy goods and services, more business expansion or invest in private properties.  Therefore lower rates lead to more business growth, higher employment rate resulting in higher spending power.

When the economy is hot and INFLATION over-run, FED have to lower rates to increase the COST of CREDIT.   The impact leads to lesser borrowing and lesser spending power.  As interest increases, many people are tempted to save money in the banks instead of taking business risk.

Higher rates mean a tighter and more limited money supply.  Therefore less spending on business and consumption as it is necessary to TAME INFLATION first then SIMULATE the economy again when there is a recession.

The RISE and FALLS of INTEREST RATES takes time to impact the economy that is why it is often terms as BUSINESS CYCLE.