Use of interest rates as an economic tool by Federal Reserve

Basically this description is based on an article shared on out google group on which I want to elaborate.

http://www.investopedia.com/articles/stocks/09/how-interest-rates-affect-markets.asp?partner=ntu9#axzz1XVXx6y77

Federal reserve acts as a guardian of an economy.

Basically,effect of interest rate is shown on following :

1. Spending(which forms the base of the article)

2.Inflation/Recession

3.Stocks/Bond markets

Affects of interest rate on SPENDING:

• Federal Reserve uses interest rate as an important tool in determining the spending in the country.
• When the interest rate falls people tend to spend more because of two main reasons: Firstly,when consumers pay less interest they have larger amount of money at their disposal which creates a ripple effect in increasing spending.Secondly,alternative option of buying US-Tbonds(treasury bonds) is less attractive as it yields a low rate of interest. On the other hand,
• Higher rates of interest implies consumers have disposable income in their hands and thus they must cut back on their spending.
• Also alternative option of buying US-Tbonds seem to be more attractive as interest rates are high which also cuts spending more. Now that we have seen have seen how federal reserve manages spending,its more important to look why federal reserve would ever try to manage spending. INFLATION AND RECESSION:
• Interest rates to a large extent help in controlling the spending which in turn helps in controlling the situation of inflation or recession in an economy.
• When there is inflation federal reserve increases the interest rates which in turn cuts spending and thus due to less spending demand is less.Hence when demand curve shifts downwards in a prices vs. quantity of goods purchased curve it could be easily seen that the new equlibrium position (intersection of supply and demand curves) of resulting price will be less. (Price, quantity) decrease from (P2, Q2) to (P1,Q1).

• So in effect cutting down interest rates has helped in reducing inflation. On the other hand during recession:
• Federal reserve lowers the rate of interest due to which spending increases which in turn helps in increasing the demand .Therefore due to now more spending equilibrium level of price will be at a higher level and hence prices will increase. US bonds and stock markets:
• Investors always choose a higher rate of return.When interest rates rise then both businessman and consumers cut back on spending.This implies less amount now will be spent in the high-risk stock market, and and hence due to lowered demand, prices of stocks will gradually fall.On the other hand bond prices will fall and their yield will increase as the low demand drives a price fall.
• There are many other methods with the help of which the federal reserve can handle inflation or recession. 
• For example it can affect the consumption by directly changing the government spending,  because more government spending implies more supply, and therefore reduction in prices .
• Or it can also cut its spending and thus help during recession. 

These methods are direct methods which have a large impact on the economy.Changing of interest rates are indirect methods of influencing the consumption in the economy.