Finance, Forex and Investments

Could somebody explain the big significance in the fed or central bank lowering interest rates or not?

IS this news overhyped? I have yet to understand why this is such a big indicator in how good the economy will be. I understand that the central bank loans money to other banks and by them lowering it or raising it gives the loaner banks a little more incentive or not to lend more money out , but is this really that big of a deal to how much money is in the economy? And also they talk about it like it is opening a water faucet or something? Where does all the money go that is already currently in the economy? Does it just evaporate or something?

Public Comments

1. Higher interest rates make it more expensive for businesses to borrow money, so they don't tend to expand so much, and might even lay off some employees. This has a downward effect on wage demands and prices in the shops. It's a way of keeping the economy from overheating.
2. think of money as something that only has power when it's moving. Money is only worth what you can buy with it. Our government controls the flow of money by using interest rates. you indicated that you get that part, with incentives to save (high rates) versus incentives to spend (low rates). Money that is already in the economy doesn't evaporate so much, but if people choose not to spend it, then it doesn't move and it does not have power. In that way a higher interest rate will motivate people to save their money and effectively slow the flow of money, which will make it seem like some of it disappeared. A lower rate will encourage people to spend, and it will make it seem like there is more money because it will move more. Higher interest rates soak up excess money in the economy in order to combat inflation. If there is too much money moving around, prices will go up. Our government is interested in keeping our economy stable, and interest rates are the factors they manipulate in order to do so.