What do they means with "the FED will raise interest rates"?

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Rcder replied on Fri, Mar 11 2011 5:16 PM

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When the Federal Open Market Committee says it plans to raise interest rates, it's typically talking about bank loans.  The Federal Reserve achieves higher interest rates by instituting a policy of monetary contraction, as opposed to expansion which lowers interests rates, by selling bonds, raising the federal funds rate, increasing the required reserve ratio, and/or calling existing loans in early where possible.

The desired effect is, of course, a decrease in the money supply and price deflation.  Since this fall in prices is coming about artificially, resources will be wasted and malinvested, just as they are during an artificial increase in prices.  When I say "artificial", I mean that these changes in prices are not brought about by new developments in demand or supply but by increases or decreases in the money supply.

And on the subject of bonds, I believe that there is typically an inverse relationship between interest rates on bank loans and interest rates on bonds, though I'm not entirely sure on this.