Somewhat similar to Diogenes, I search for a logical man. I want to find someone who can answer a few simple questions about Money and The Federal Reserve.
Can The Fed Raise Rates?
I hear and read a lot of pronouncements about how The Federal Reserve will raise rates and increase or reduce the money supply. Generally knowledgeable people make these statements; however, I have some serious questions about the validity of these statements. Because of these questions, I seek a logical person who can answer them clearly and precisely.
Because of the underlying complexity of this subject, I will post my questions one at a time. First, I will ask about raising rates.
This first question consists of a simple matter of math logic.
How can The Fed unilaterally raise rates when an interest rate amounts to a dependent variable? The difference between an amount borrowed and the amount paid back consists of the amount of interest. Knowing the dollar amount of interest and the time between borrowing and paying back, we can calculate the rate of interest.
I know of no way to change an interest rate without first changing the amount borrowed, the amount repaid, or both. Yet knowledgeable people continually say, “The Fed will raise rates.”
Please respond to this question in the comments and explain the assumptions supporting your answer or cite a credible source.
In later posts, I will address my questions about the significance of Fed Funds and The Fed’s role in changing the money supply.