The stock market. Employment levels. Auto sales. Inflation. New housing starts. Credit card interest rates. These components of the U.S. economy and many others that have a significant impact on individuals are all affected by the short-term interest rate regulated by the Federal Reserve System (Fed) and its chairman, Alan Greenspan. The Fed is responsible for regulating the nation’s money supply in order to bolster economic growth. One of its main methods of regulating the money supply is its autonomy in setting the short-term interest rate, the amount of interest it costs banks to borrow money for short periods from other banks in possession of surplus reserves.
The interest rate affects all Americans either directly or indirectly. It affects them directly in such ways as credit card interest rates, inflation levels, numbers of car sales, and from its impact on employment levels. If affects them indirectly by having an impact on the stock market (often directly here also), economic growth levels, and from its affects on the world economy. Historically, economists argued that the economy could experience low levels of unemployment or low levels of inflation, but Greenspan’s policies have created the longest running period of economic expansion in U.S. history wherein we are experiencing both “People think he’s [Greenspan] God. They think he’s responsible for low inflation and low unemployment. We’ve been told we can have one or the other but we have both.”
We can see how the interest rate directly affects individuals if we look at its impact on credit card interest rates. As with most economic theory, there is some difference of opinion as to the exact affects of the interest rate on credit card interest rates, but no one denies there is a connection between the two. When the Fed hikes the short-term interest rate, even by a half a point, banks often raise their prime rate which is the rate of int...