The purpose of the commitment by the Fed to keep the federal

The purpose of the commitment by the Fed to keep the federal funds rate at zero for a long period of time is to

A) lower the long term interest rates.

B) lower the short term interest rates.

C) increase the long term interest rates.

D) increase the short term interest rates.

Solution

Correct option is (A).

Federal Funds Rate (FFR) is the interest rate charged by commercial banks on credits extended to one another for overnight lending. This reflects term structure of interest rates. When FFR is kept very low (zero or near zero) for a long time, people expect interest rates to remain very low and investment and lending activities increase, so long term rates remain very low.