Definition and Mechanism of Interest Rate Hikes/Cuts
Interest rate hikes refer to raising the benchmark interest rate, while interest rate cuts refer to lowering the benchmark interest rate. Both measures are important tools for central banks to control the money supply and reflect the central bank's policy orientation towards interest rates. Central banks adjust the benchmark interest rate to control the money supply in society, thereby influencing prices and the labor market.
The operation principle of interest rate hikes/cuts
Taking the Federal Reserve System ( Fed ) of the United States as an example to explain how it operates:
When the economy slows down, the Fed will lower the overnight lending rate, allowing banks to borrow from each other at a lower cost, and then lend to individuals and businesses at lower interest rates. This low-interest rate environment encourages consumers to increase borrowing and spending.
On the contrary, when hyperinflation occurs, such as in the recent economic situation in the United States, the Fed will raise interest rates, the cost of bank borrowing will increase, loan interest rates will consequently rise, and consumer spending will decrease.
The operational methods of central banks in various countries differ. The United States mainly relies on