An increase in interest rates by the Federal Reserve is an example of monetary policy. This policy is implemented to control inflation, manage employment levels, and stabilize the economy.
When the Federal Reserve (often referred to as the Fed) raises interest rates, it becomes more expensive to borrow money. As a result, consumers may reduce spending on big-ticket items, such as homes and cars, while businesses might slow down on investments. This decrease in spending can help cool off an overheating economy and bring inflation under control.
Conversely, lowering interest rates is typically done to stimulate economic growth. It encourages borrowing and spending, which can help boost the economy in challenging times. Thus, the actions taken by the Fed through interest rate adjustments are crucial tools in shaping the overall economic landscape.