answer:Lower federal interest rates make it easier—that is, less risky and burdensome—for large businesses, especially private banks, to borrow money from the federal government. This in turn makes these large businesses more willing to loan to individuals and smaller businesses; they generally lower their interest rates too, to stay competitive. The intended effect (or advantage) of a lower federal interest rate is to increase activity in the national economy. With lower interest rates, people and businesses are more willing to engage in financial risk (since borrowing costs less and loaning is less risky) and therefore to engage in more business ventures. The greatest risk (or disadvantage) is inflation, or devaluation of the currency being loaned (relative to the “absolute” value of real property). If the fed lowered rates “all the way,” we’d have a system in which dollars were being given away for free…and the dollar would therefore be worth nothing at all. By the same token, a very small drop in interest rates can negatively effect the value of currency. The problem here is that if a lowered rate simultaneously increases the amount of money being lent and also decreases the real value of that money, the economy is not really becoming more active at all. More dollars are changing hands, but not more real value. The idea is to sometimes lower and sometimes raise rates in order to maintain a balance between the perceived risks of investing and the practical value of currency, all the while avoiding the ‘overheating’ of an inflated economy or the ‘stagnation’ of an economy with overvalued currency and too-high rates. (Adding the question of growth to the equation makes stagflation an equal danger, though a more complex problem:
http://en.wikipedia.org/wiki/Stagflation) Other than the gigantic corporations that are directly effected by changes in the federal interest rates, the most direct impact is upon the stock market and upon people trying to borrow money. (If you invest in the stock market, your money is directly tied to the fortunes of big companies, whose stocks generally will rise, at least for a time, when the fed lowers rates. And if you want to, say, get a loan to buy a house, banks will in theory be more willing to loan you money when the rates they pay are lower, and they should charge you less interest too.) But because of the huge impact that federal economic controls have upon the market, a change in interest rates should “trickle down” to every aspect of the economy, including the price of cheap consumables. For more information, try:
http://en.wikipedia.org/wiki/Federal_Reserve_System