How does the federal interest rate work?

Please explain what the federal interest rate is and how it effects the U.S. economy. What are effects of raising the rate and what are the effects of lowering it?|||In the United States, the "fed rate", or federal funds rate is the interest rate at which banks borrow money at the Federal Reserve or lend it to other banks.





What happens when the Fed lowers this rate?





Banks will have access to fresh money at a lower cost, meaning that they have themselves more money available to lend out, and also at a lower cost. This is could for all participants in the economy: industrial companies have it easier to find money to invest, mortgages go down, etc.





As a result the economy will expand, make more profit in the long term. The stock market of course anticipates this and goes up.





On the other hand, lending out dollars will return a lower interest rate than before: the dollar goes down.