Finance, Forex and Investments

How does the Federal Reserve cause inflation by lowering interest rates?

Recently there's been a lot of talk in the political sphere about how the Federal Reserve debases the dollar whenever it lowers interest rates, but how do the mechanics of this actually work? How does lowering interest rates increase the total number of dollar in circulation? Isn't the U.S. Treasury responsible for printing dollars? Could I please get a simple explanation of how this all works.

Public Comments

1. Because all of a sudden, by lowering the interest rates, more money is out there because not as much is owed. I was very bad in economics though. I'd bet that is what you are taking, lol.
2. The Treasury prints the money, but the Fed actually puts into circulation through the banking system. In order to lower the interest rate, the fed buys bonds from banks. In order to induce the banks to sell, they offer a premium over the current market value. This affects two markets simultaneously. First, the treasury bill market rises, as the new price for the bonds is what the Fed just paid. This will result in the yield, or interest rate, on the bonds falling. Secondly, the banks now have more funds at their disposal to lend out above their reserve requirement (since they sold the bonds at a premium). They will therefore make new loans increasing the supply of money and lowering the price (the interest rate). Thus, money enters the real economy through the new loans. So how does this relate to inflation? All these banking manipulations do at the end of the day is create more money. There has not been a change in the amount of economic activity that money is spent on. Since you now have more money chasing the same amount of "stuff", prices have to rise to equalize this imbalance.
3. if the Fed lowers interest rate, it is supplying more money into the economy, the banks have more money sitting around doing nothing so they loan them out at a cheaper rate, people borrow more, they borrow to buy, thus increasing demands for goods and services, once supply cannot meet demand there is inflation which is an increase in general prices.