Editing Interest rate (section)

==In macroeconomics==

===Output, unemployment and inflation===
Interest rates affect economic activity broadly, which is the reason why they are normally the main instrument of the [[monetary policies]] conducted by [[central bank]]s.<ref name=Blanchard>{{cite book |last1=Blanchard |first1=Olivier |last2=Amighini |first2=Alessia |last3=Giavazzi |first3=Francesco |title=Macroeconomics: a European perspective | chapter=Monetary policy:a summing up | date=2017 |publisher=Pearson |location=Harlow London New York Boston San Francisco Toronto Sydney Dubai Singapore Hong Kong Tokyo Seoul Taipei New Delhi Cape Town São Paulo Mexico City Madrid Amsterdam Munich Paris Milan |isbn=978-1-292-08567-8 |edition=3rd}}</ref> Changes in interest rates will affect firms' [[investment]] behaviour, either raising or lowering the [[opportunity cost]] of investing. Interest rate changes also affect [[asset prices]] like [[stock price]]s and [[Real estate appraisal|house prices]], which again influence households' [[Consumption (economics)|consumption]] decisions through a [[wealth effect]]. Additionally, international interest rate differentials affect exchange rates and consequently [[exports]] and [[imports]]. These various channels are collectively known as the [[monetary transmission mechanism]]. Consumption, investment and net exports are all important components of [[aggregate demand]]. Consequently, by influencing the general interest rate level, monetary policy can affect overall demand for goods and services in the economy and hence [[Output (economics)|output]] and [[employment]].<ref>{{cite web |title=Federal Reserve Board - Monetary Policy: What Are Its Goals? How Does It Work? |url=https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm |website=Board of Governors of the Federal Reserve System |access-date=16 September 2023 |language=en |date=29 July 2021}}</ref> Changes in employment will over time affect [[wage]] setting, which again affects [[pricing]] and consequently ultimately inflation. The relation between employment (or unemployment) and inflation is known as the [[Phillips curve]].<ref name=Blanchard/>

For economies maintaining a [[fixed exchange rate system]], determining the interest rate is also an important instrument of monetary policy as international [[Financial capital|capital]] flows are in part determined by interest rate differentials between countries.<ref>{{cite web |title=Fixed exchange rate policy |url=https://www.nationalbanken.dk/en/frequently-asked-questions/fixed-exchange-rate-policy |website=Nationalbanken |access-date=16 September 2023 |language=en}}</ref>

=== Interest rate setting in the United States===
[[Image:Federal funds effective rate 1954 to present.svg|thumb|right|375px|The effective federal funds rate in the US charted over more than half a century]]
The Federal Reserve (often referred to as 'the Fed') implements [[monetary policy]] largely by targeting the [[federal funds rate]] (FFR). This is the rate that banks charge each other for overnight loans of [[federal funds]], which are the reserves held by banks at the Fed. Until the [[2008 financial crisis]], the Fed relied on [[open market operations]], i.e. selling and buying securities in the open market to adjust the supply of reserve balances so as to keep the FFR close to the Fed's target.<ref name="OMO">{{cite web |title=Open Market Operations |url=https://www.federalreserve.gov/monetarypolicy/openmarket.htm |website=www.federalreserve.gov |publisher=Federal Reserve System |access-date=16 September 2023 |language=en |date=26 July 2023}}</ref> However, since 2008 the actual conduct of monetary policy implementation has changed considerably, the Fed using instead various administered interest rates (i.e.,  interest rates that are set directly by the Fed rather than being determined by the market forces of supply and demand) as the primary tools to steer short-term market interest rates towards the Fed's policy target.<ref>{{cite web |last1=Ihrig |first1=Jane |last2=Weinbach |first2=Gretchen C. |last3=Wolla |first3=Scott A. |title=Teaching the Linkage Between Banks and the Fed: R.I.P. Money Multiplier |url=https://research.stlouisfed.org/publications/page1-econ/2021/09/17/teaching-the-linkage-between-banks-and-the-fed-r-i-p-money-multiplier |website=research.stlouisfed.org |publisher=Federal Reserve Bank of St. Louis |access-date=16 September 2023 |language=en |date=September 2021}}</ref>