Posted 12/13/2023, 4:00:00 PM
Fed Sets Stage for 2023 Rate Cuts After Aggressive 2022 Hikes to Fight Inflation
- The Fed doesn't directly control interest rates, but sets a target range for the federal funds rate that influences borrowing costs
- The federal funds rate is what banks charge each other for overnight lending of excess reserves
- The Fed pays interest on bank reserves, which establishes a floor for what rate banks will accept to lend reserves
- To raise rates, the Fed sells Treasuries from its balance sheet, decreasing bank reserves and making them more expensive to borrow
- The Fed has raised rates aggressively in 2022 to fight high inflation, but is expected to start cutting rates in 2023 to stimulate the economy