Interest Rate Rules for Seasonal and Business Cycles

When the Federal Reserve System was established in 1914, part of its purpose was "to furnish an elastic currency," that is, a currency that could be quickly expanded or contracted as needed. Today, the Fed fulfills this function by supplying the reserves needed to prevent wide seasonal swings in interest rates. When money demand increases sharply during the holiday season, the Fed steps in and supplies the liquidity necessary to keep interest rates from rising. Monetary base growth is high during the fourth quarter, when output rises, and low during the first quarter, when output falls.