1) To stimulate the economy, the Fed decreases increases steadies the money supply.
2) The initial effect would be to cause short-term rates to decline; however, a larger constant smaller money supply might lead to an increase in expected future inflation
3) which would cause long-term rates to rise even as short-term rates fell. The reverse is true when the Fed eases tightens the money supply.
4) If the government spends more than it takes in as taxes, it runs a deficit surplus, which must be covered by additional borrowing or by printing money.
5) If the government borrows money, this steadies decreases increases the demand for funds
6) and steadies decreases increases interest rates.
7)If the government prints money, the result will be constant decreased increased inflation,
8) which will level decrease increase interest rates.
9) So, the larger the federal surplus deficit, other things held constant, the lower higher steadier the level of interest rates.
10)If U. S. businesses and individuals buy more goods from abroad than they sell (more imports than exports), the U. S. is running a foreign trade surplus deficit, which must be financed.
11) This generally means that the U. S. borrows from nations with export surpluses deficits.
12)The larger the trade surplus deficit, the higher the tendency to borrow, so U. S. interest rates become highly dependent on interest rate levels abroad.
13)Consequently, this interdependency constrains facilitates the Fed's ability to use monetary policy to control U. S. economic activity.
14) Business conditions influence interest rates. During boom recession, the demand for money and the inflation rate tend to fall and the Fed tends to level increase decrease the money supply to stimulate the economy.
16)As a result, there is a tendency for interest rates to decline during recessions booms.
17) During recessions booms , short-term rates decline more sharply than long-term rates because (1) the Fed operates mainly in the short-term sector, so the Fed's intervention has the strongest effect there; (2) Long-term rates reflect the average expected inflation rate over the next 20 to 30 years and this expectation doesn't change much due to the level of current inflation.
18) So, short-term rates are less more volatile than long-term rates.