DislikedThats Frikin genius!
So the process of a CB decreasing the interest rate leads to other banks lending off the CB, and then they lend to the public also at a decreased rate(obviously higher than the CB rate though- this is where the banks profit). This lower rate means in turn the Public demand is higher, so more money enters the country to combat recession.
How would the CB decrease the money supply though? cutting interest rates would just render supply static I would imagine.Ignored
In reality the banks try NOT to borrow from the Fed because it is a sign of them having credit problems and the market will hammer their stock/bond issuances. They prefer to get their money from the money market. The "Fed Funds Rate" is a) the rate the Fed charges for loans at the discount window and b) the rate banks with excess reserves will loan money to each other at through the money market.
The banks order of priority for loan proceeds goes:
1) Customer checking/savings account balances (Cost of ~0%)
2) Overnight lending from another bank through the money market (.25%)
3) The Fed (in emergency siuations when they can't get the funds they need from 1 or 2) (.25%)
Other then that your golden. Borrow from the money market at the Fed Funds rate (currently 0-.25%) and loan it out at prime+ (1.25%+), pocket the spread.
On the flip side, the Fed can reduce demand for loans by increasing the rate. At 2% a loan is very attractive. You can borrow money and invest in anything that will give you a risk adjusted return of over 2% and be profitable. If the fed pushes the Fed Funds rate to say 5%, plus the bank spread of 1%, you then need to invest in something that yields over 6%. Not quite as easy. This lowers demand for debt and cuts consumption as a result.
Lower demand = lower inflation
Forget about money supply...