Expert: Paul Henneman - 5/31/2006

Question
Hello:

I want to thank you for your helpful answer. I do have a follow-up question.

Do you know why the term "tighten" is used for the raising of interest rates?

I thank you for your follow-up reply.
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Followup To

Question -
Hello:

Here is my question:

Does the Federal Reserve raise or lower interest rates when it tightens interest rates?

I thank you for your reply.



Answer -
Thank you for your question! The Fed raises interest rates when it 'tightens' and lowers interest rates when it 'loosens'. The fed uses interest rates to control the flow of money. Lower interest rates means it is less expensive for companies (and individuals) to borrow money to grow their businesses or borrow money for purchases. This is a loosening of money supply. The opposite occures for a tighter environment.
I hope this helps, please do not hesitate to follow up with me if I can be of any further assistance,

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com
www.VEReports.com
www.ValuEngineView.com
www.VEInstitutional.com


Answer
Thank you for the follow up question!
While I can't be certain, I believe that it is simply because the Fed is trying to restrict the flow of capital by raising interest rates. In other words, 'tighten'. As in when you tighten something, you restrict it as well. So it is simply another descriptive word that indicates there is less flow.  Specifically why the word tighten is used I have no idea, other than it is a descriptive word for what the fed is trying to do by raising interest rates.
I hope this helps,

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com
www.VEInstitutional.com
www.VEReports.com
www.ValuEngineView.com