>Ok, I'll admit it, I don't really know exactly how the
>Fed guides the economy.
>
>The want to stimulate the economy, so they drop rates.
>This means loans cost less so people are more likely to
>take a loan and build a factory or whatever. This I
>understand. However, doesn't the Fed also control how
>much money is in circulation by buying or selling
>bonds? How does this work? They bid high on t-bills,
>thus drawing money from banks? Why do the banks have
>to sell? And wouldn't they have to pull huge amounts
>in to make any difference?
No one really knows how, or sometimes even if, a central bank influences an economy. And while raising interest rates can slow an economy down, it may take pretty dramatic increases to take effect - and it's hardly a dead certainty that lower rates will stimulate an economy. They usually do, but not always. As for the money supply, they can try, but a lot depends on whether people want to borrow money and/or banks want to lend it to them. Again, it's easier for a c.b. to slow things down than it is to speed them up.
Doug