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Fed affects banks, rates, prices and jobs

Prices you pay
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Prices you pay

The Fed's actions indirectly influence the prices you pay at the grocery store, gas pump and other retail outlets. That's because the cost and availability of money affect people's willingness to pay for goods and services. When money is cheap and plentiful, there's more demand and prices tend to rise.

"It's still very difficult for firms to raise prices in the current environment," says Faucher. "When the economy's doing really well and the labor market is good and the unemployment rate is falling, that's when you have concerns about employers hiring and bidding up wages and inflation rising."

It's easier to stop inflation than it is to break out of a deflationary cycle, says Ara Oghoorian, a CFP in Los Angeles who previously worked for the Fed as a bank examiner.

Recently, the Fed grew concerned about possible deflation -- a cycle of falling prices that is very damaging to the economy -- and lowered interest rates in order to actually bring the inflation rate closer to the 2 percent or 2.5 percent that is considered healthy.

The Fed most wants to prevent a repeat of the "lost decade" of stagnant economic growth in Japan when prices fell, people delayed purchases in hopes of cheaper prices, and that caused prices to fall even further.


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