How does a low rate of inflation affect the economy?

Am I wrong? Interest rate increases tend to be the result of a good economy to fend off inflation?

• It seems like when investors hear that interest rates are going to rise, they will have less money to buy stocks so they pull out of stocks. And also they pull out of stocks when the economy is bad and the stock market could crash. But we only have really low interest rates when the economy is bad. I'm just confused? Do they want a good economy with low interest rates and low inflation? Is that possible?

• Answer:

  It's far too complicated to go into everything in yahoo answers, but one of the reasons the federal reserve increases the fed funds rate is to reduce inflation risk. The fed funds rate is a rate that banks borrow at. When banks borrow at higher rates bank customers pay higher rates. When companies pay higher rates their interest expense increases which will have a negative effect on income in the short term and it will also discourage them from taking on big projects (which require borrowing lots of money). This slows down business in general which is why people pull out of stocks when the fed mentions inflation. When the economy isn't doing so hot the fed lowers the fed funds rate in hopes that companies will start doing bigger projects, etc.