The Federal Reserve (Fed) only controls one rate of interest, and it is a very short-term rate called the federal funds rate, the rate that banks charge each other for overnight, intra-bank loans. The rest of the rates, i.e., longer-term rates, are determined by the markets. Thus, when the Fed increases the federal funds rate, it does that by selling bonds into the market and thus ‘drying’ the market of liquidity. This reverberates in the market for loanable funds, pushing longer-term interest rates higher across all of the maturities. It is a very inefficient way of doing things, but it is the only way it has to ... (full story)