JUL 6 My answer to a student as to why the Fed is lowering rates.

During the recession in 2008, could the government predict this as the inflation was decreasing over time?  When the housing crisis occurred one of the problems was the lower interest rates for unequipped buyers. In the book it states “during a recession, federal reserve tries to drive down interest rates”. Can you explain how this helped during the recession? 

Simply put, when the Fed floods the markets with cash by literally printing money that in effect lower interest rates, more capital is seeking fewer lenders. The risk the Fed faces is that all of this cash can cause inflation. In a recession that is less of a concern.

In a recession, lower rates cause investors to buy stocks, houses cars etc. because the capital in the bank is not earning money. Every investment starts to look better as compared to capital in the bank. You will especially see this when you use lower discount rates in using time value of money calculations.

I hope this helps.