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According to the Fed Purposes & Functions (2005), “The Federal Reserve System is the
Central Bank of the United States. It was founded by Congress in 1913 to provide the
nation with a safer, more flexible, and more stable monetary and financial system. Over
the years, its role in banking and the economy has expanded. (p.3)
To understand the federal funds rate is the interest rate charged by banks when they loan each other by overnight. This funds rate vacillates upon to the supply and demand and would not under by Fed directed control, but strongly influenced by the Federal Reserve Action. The Discount rate is interest rate charged by the Federal Reserve when Fed Fund been released or/and borrow by other banks at overnight. This discount rate is under Fed control directly. Federal Fund Rates is always higher than the discount rate. Generally, only large banks borrow directly from the Fed then the Discount Rate is getting a lower discount rate from Federal Reserve so these big banks would be benefited from it.
“The Federal Reserve controls the three tools of monetary policy--open market operations, the discount rate, and reserve requirements. The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, and the Federal Open Market Committee is responsible for open market operations. Using the three tools, the Federal Reserve influences the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks and in this way alters the federal funds rate. The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.”(2005) Board of Governors of the Federal Reserve System
Firstly, we should realize that most developed countries have a Central Banks like Asia Central Bank, European Central Bank in which control certain kind of short term interest rates. This short-term rate as fed fund rates will create an impact to related markets as bond, stock, mortgage and others interest rates. In the United States, we have Federal Reserve System where it run and control by Board of Governors is the Central Banking system of U.S. It has been called a short name as “Fed”. It is an organization to include a number of State’s momentousness and private institutions. Grant governor is headquarters’ of Federal Reserve and place headquarters at Washington, D.C. grant governor embody seven appointive governors by president and been passed by United States of American Congress. Within a system included twelve Federal Reserve Banks and twenty five branch office covers United States of America manor under governor Department’s direct behest. These banks are embodied: Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Saint Louis, Minneapolis, Kansas city, Dallas and Evened Francisco.
“The most powerful weapon in the Fed’s arsenal is the ability to influence the direction of interest rates. When interest rates are low, capital is easier to acquire. This can spur economic development because, human nature being what it is, the more cash you have available, the more you are likely to pay for something you want – whether it is a car or that new plasma screen television. Left unchecked, however, and the result is “too much money chasing too few goods,” as the saying goes. This leads to inflation as businesses realize they can charge higher prices for their goods and services.”(2005) Joshua Kennon
Nowadays, most of Central Banks in the world has more than mains bi-functional number: administer currency policy and assure stabilization and secure give trade bank in particular and some portion to system is national finance system. U.S Central Bank’ roles are to control, balance and regulate the supply of money in the U.S economy. They maintain fund resources at a Federal Reserve Banks to play a major role in the US banking system for demand and supply at private banks. In generally, Department’s common task Governor that be propose currency policies, research parse data economically at home and a aboard. Fed will supervise all of U.S
banking system. Summarily, in U.S. ‘banking system, liquidity inter-bank offer rates
LIBOR that most private institutions borrowed to manage often flap in Fed Funds Rate
and Discount Rate is two policy tools to monitor. Presently at about 40% private
institutions and trade banks are Fed’ members, all of national banks, uniformization is
member. Banks have a support and patronage from government to participate if enough
of a number of some conditions Associates. According to Lui (2008),”The Treasury and
the Fed have closely coordinated their foreign exchange operations since early 1962,
when the Federal Reserve commenced such operations at the request of the
Treasury.”(p.1). The most important body of Fed Reserve System is Federal Open market
Committee (FOMC) where responsibly research and propose currency policy to sustain
the stabilization of the prices and boost the economy. The voting member (totally that
add 12) of the 7 governors FOMC embodied the governor Department, include president
of New York Fed Bank, other four Chairman’s of Fed banks have a rotation to voting
rights Fed Chairman granted a meeting. FOMC reunites about eight times per year at
Washington, D.C. for once per a half months average to consult together about the U.S of
economic situation and select measures currency policy is likely for ever episode. There
are also three main boards: Federal Advisory Council, Consumer Advisory Council, and
Thrift Institution Advisory Council. With a perfectly form of FED and a facility,
capacity at a plenty remain their services like a normal bank and provide it to its clients,
who tell intelligibility, Fed’s clients are another banks in the area to make sure US
Banking System performances an unification and guarantee, payment system’s safety.
For example, whenever client receives money odder past money or electronically usual
then a Fed will implement banks middle remittance works together. One of the biggest
client of Fed is U.S. government. Like you there is a bank account in bank, US treasure
also has a suite bank account in Fed Bank. All government taxation and revenue sources
and spending is under controlled from this account. In additional, Fed bank sells and
buys treasury Bills, Notes, and Bonds according to counter-bid modality in open market.
Fed also has hard cash and task note issue. In fact, The Treasure produced monetary but
Fed directly in circulation its money supply to all banking system. Fed is also
responsibility to monitor and control fiat money’s corrupt status and eviction, destruction and replacement pay extra dilacerations. Moreover, Fed responsibility tune and supervise action of allover US, banking activities in this nation, this means apply to all foreign going banks and international banks are actives in this US territory. One more little task of Fed is quota canon investors are borrow via intermediary Agencies to obtain more shares, this quota is fifty percent, means that people invested is buyable number of share doubles one hand sum of money, moiety because of borrow intermediary Agencies possession. Lui (2008) found that “The reality is that the Fed has a long tradition in supporting the lead of the Treasury in intervening on the exchange value of the dollar, albeit not always to keep the dollar strong.” (P.1) Why these fund rates and U.S Central Bank’ role is important to U.S economy and world economy, all of their decision makings and actions are have a range affected deeply and broad that not only give U.S territory economy personally but also affect no-home come to cosmopolitan possession economy. Just saying in a comprehensiveness way, United States of America currency and monetary policies related to resolutions and action of Fed with a view to impact come to money capacity and U.S economy credits on the market. All changes about money runoff and credit will affected direct that come to interest rates. Simply responding, if credit and money supply inadequate that give reason tense to everybody’s cost of borrow will be increased therefore interest rates must ascent, and in the opposite money supply and credit are over the demand then interest rate have to beat down the rates to encourage newly borrowers. From this concept, Fed has carried three main measures as an effective weapon for impact to following currency policy. First, when the market place action is extended, Fed consecutively to sell bills and to buy stock and treasury bonds and securities of government via fed banks. “Extended market place” means that counter-bid formality past securities trade Fed on the market is free, is not imposed and leave natural economy law that govern securities prices. Second, Whenever Fed decides want to lower interest rates, Fed banks will diligently purchase government’s securities in addition to open market and cash a mass insufflations and essential credit into reduction economy until who then interest rate s down up to desired level. Thirdly, Inverse its option above when want to increase interest rates, Fed banks will sell government’s securities and aspirate money capacity and credit. However, when rise sells, securities price is following downfall and corollary is rise increment interest rate.
Preferential interest rates resolution is Discount Rates where Fed allowed its members to obtain short-term loan overnight with a view to statute response must deposit 10 percent. All changes of Fed about this Discount rates will astringed come to federal fund interest rates in which loan house each other overnight also for collateral request response is aforementioned, because there must not who it is also possible to borrow Fed possession easily. It got to realize the differences and relations between fed funds rate and discount rate but the differ in nub is the discount rate often lower than fed funds rate where owing to natural economy law by its determination. Federal fund rates main is interest rate what Fed want to attain back of section meeting. Present are live in leveling 2.0 percent.
The relative values of the dollar and other currencies are determined by the supply and demand for each currency. The demand for dollar-denominated items can be thought of demand for goods services and the demand for capital goods like real estate and stocks and bonds. The threat of inflation can make dollar-denominated goods seem like they will not be as valuable in the future, making worth less now. This reduces the demand for dollar denominated capital goods. The value of the dollar will naturally fall until the supply and demand for it and the euro reach equilibrium...as the value of the dollar falls, US goods seem cheaper and the demand for US goods should increase. U.S dollar has a little impact of its revaluation when the lat meeting of FED on August 5, 2008 to keep it key interest rate on hold at 2.0 points acknowledgeable cloudy economy growth and inflation pressures. I think this is a smart decision making from Fed at this recession time. I would sure U.S economy are in deep depression by a lot other elements combined such as financial/lending crisis, mortgage and house sign market corruption, jobless rises over 4.5 percent annually and oil price. Therefore, we would set a priority, need not only to contain our economy inflation but to boost our economy growth of per capital GDP again above 3.0 percent yearly. US dollar still a key to global financial markets for other economy reverse, it still hold its title for world currency dominant. For the next ten years, its devaluation continually helps to shrink our trading deficits.
A U.S dollar continually its weakness by a few things U.S economy in facing as the Iraq
War coupled with the Government tax cuts pushed the US into a severe budget deficit,
which raises fears that the US will default on its debt or instead just increase the money?
supply to cover it, lowering the value of the dollar. The increasing price of oil (again over
the past few years, even if the last few weeks have bucked the trend) has increased the
US trade deficit, which also decreases the value of the dollar. Recession fears and the
credit crisis have prompted the US Federal Reserve to lower interest rates. Lower interest
rates give less incentive for people to maintain balances of USD, so they look to other
currencies. Askari and Krischene stated (2008) “Since 2002, a number of key indicators
have signaled rapid inflationary pressures, casting an ominous cloud over the US
economy: the US dollar has depreciated by about 75% relative to the euro, crude oil
prices have increased five fold, gold prices have increased threefold, and all commodities
prices have been rising at a rate approaching 25% per year.” (p.1)
The recent small recovery in the value of the dollar is based mostly on the expectation that the ECB and the Bank of England will soon have to take similar measures while the US will have to raise rates next three years or five to stave off inflation. Finally, the existence of the Euro, the US may be the world's largest economy for a single country, but the combined economies of the Euro-using countries are slightly bigger than the US economy. Instead of being the only game in town for currency reserves, the USD demand is now being split with the Euro.
“The Fed has been pursuing many objectives simultaneously: restoring housing prices so owners will keep thinking they are wealthy and continue to spend lavishly, maintaining stock indexes on a rising path, and preserving full employment; in the process, the Fed was minimizing the negative effects of inflationary pressures and risk of a falling dollar.”(2008)
Askari and Krischene
Try to think of fiscal responsibilities as those that involve government spending on social services, running agencies, military, and any other spending that our elected officials have approved. Monetary responsibilities deal with the stability of the dollar (in the US) and have to do with the management of the Central banking system, which is what the Federal Reserve is, the Fed. The Fed does not deal in political affairs but is largely independent, while the US treasury carries out the spending habits of our government.”
How Interest rates and monetary policy will effect to each citizen in daily life, well for starters, every time the Federal Reserve lowers the interest rate it is meant to encourage people and companies, and foreign countries to take out and/or refinance loans. this puts more money into the system and increases economic activity. Also, things like the economic stimulus package help marginally, but the government has to borrow money from other countries to finance this package, which increases our national debt. Taxpayer will be bear all the responsibility to pay it back in the next generations. This related to tax increasing each year from each single taxpayer. The US tax code also play a crucial role to the increasing of globalization of economic competition. U.S tax policy must create a convenient environment for foreign-based corporations, remembering U.S. Economy has an integral part of multinational corporations, its domestic success are conjoining from foreign activities. It is also a caution for US tax policy that would not impact the capacity and ability of U.S. multinational corporations to compete successfully around the world economy.
The past 25 years have been the best stock market for investors in U.S. history. The Dow Jones industrial average hit bottom on Aug. 12, 1982, at 776.9, while interest rates were at 15 percent. Since that date, the compounded rate of return from the last quarter of 1982 until this summer, circa 2007, has been 11.8 percent. Taking into account inflation, the rate of return has been 8.5 percent! This was the result of policy decisions in the 1980s, 90s and more recently - confirming the fact that lower tax rates on capital and labor, sound monetary policies, with open market initiatives and liberalized trade leads to stronger economic growth and rising values in equities. Despite several events from Y2K to 9/11, from Hurricane Katrina and the rising defense spending in the war on terror, the U.S. economy is the model for the world as more and more nations from Brazil and India to Russia, China, and Eastern Europe begin to emulate our entrepreneurial pro-growth economic ideas. Nowadays, the Global economy is certainly bigger and more vibrant than ever. I don't think America has quite adapted to its new place in that economy, though, nor is it ready to deal with the realities of it going forward. Truly, the effective tax rate on the wealthy dropped from 70% to 15%, since most of their income is from capital gains and dividends. When interest rates are high the aggregate demand in the economy will fall so that people stop buying goods or/and services. This means that consumers have less cash to spend on food, groceries, petrol, household items etc. This will be worse for items that are not needs but are want or luxuries. This might called deflation.
Americans continually facing the demand for goods- especially food, I am sure has
fallen. Prices are high, so I am sure the quantity demanded for goods has fallen. Gas
prices are rising too. I think that the demand for houses has fallen. Supply is higher than
demand- many more houses have been built than demand (more supply than consumer
demand). Also banks, etc have tightened up the ability for people to get loans, mortgages,
and all so that makes demand fall too. Government spending is high. With two wars, our
spending is pretty high. Plus, we are still spending a lot on social security and education
along with defense and health care system. Somewhere along the line, I think reform
needs to be made. According to the Matt and McClathy, “New York Sen. Hillary Clinton
vows that as President, she'd return the country to "fiscal responsibility,"(2007). The
General Accounting Office (GAO), if they have not already- needs to examine where we
are spending money. They also need to make reports on what we're spending well on and
what we're wasting money in. Unemployment has grown over the last year or so. I would
not say much on it. It has grown nonetheless. Even the FED cut interest rates to help
grow the economy and address the slow economy. However, they have not worked and
there's been a side effect. Because interest rates went down, inflation has gone up. Yet the
FED could not raise rates right now because that would kill some growth and slow the
economy more. The bottom line I would think US government have much better
monetary policy for the next three years and must engage the fiscal responsibly
immediately and seriously. Some people say that what’s happening now in the US
economy is similar to what occurred in the Japanese economy after its real estate bust. If
this comparison turns out to be accurate. Then US fed rate may stay close to zero for a
long, long time. The prolonged US recession will keep Fed Funds Rate frozen over the
next two years. If not the decline and in value of dollar combined with increased demand
for oil and other commodities from developing economies will increase inputs and price,
creating inflationary pressure. Moreover, declining value of dollar will increase demand
for US goods and will push employment upwards in which creates potential for upward
pressure on wages. Fed Funds rate will increase to compensation of inflationary pressure
and dampening effect on economy will be mitigated by increased demand for US goods
from cheaper dollar in the next five or ten years. Another study of Askari and Krichene
discovered, ” In sum, prudent monetary policy supported by selective federal guarantees
and programs are the medicine that the federal authorities should administer to the
markets now before more damage are done.”(2008)
Unites States of America federal reserve is a stiff essential division with respect to
U.S. economy in particular and of the entire world generally. This system plays a role as a
“Constabulary” with respect to the total America banking system and also namely as a
division that leading bodies proposes US policies in order to warrant a boost averagely
the U.S. economy growth and reduction jobless and containing its inflation and deflation.
In fact, Federal Reserve System act as a U.S Central Bank and there primary mission
namely “ sustained that boost economically, rate of unemployment reduction, free price
to keep dollar copper’s buying power and keep interest rates kinds proportion in level
average”. In short, it would be constructed steadily a banking system to support for a
healthy economy. To all developed economies, the most important key is not really to
boost its economy growth fast but to control and monitor its economy level not to “hot”
in which causes a national inflation. The sorrow experience from the primary causes an
economic crisis era in the year 1929 showed of the crisis, cum the downturns
economically owns to inflation elements outmatched range. Therefore U.S. Central
Bank monitor adjoin index omens about inflation to have accommodation measure very
carefully. However, because each once changes interest rates, only probable efficiency be
evinced from twelve months to later annual plant ought to the work of the economically
generally deep and broad wall small pagoda arduous and an event required extremeness
from Fed Chairman and experts in committee. According to Kimberly Amadeo (2007),
“The FOMC changes the federal funds rate to control inflation while maintaining healthy economic growth. As difficult as these sounds, it is even harder when you realize it can take 12-18 months for the effect of the change to percolate throughout the entire economy. To maintain the expertise necessary to plan that far ahead, the Fed has become the nation’s expert in forecasting the economy.” (p.1). Sometime, increasing interest
rates excessively versus economically better in healthy way is to damper it’s economic
growth. Insisting the action of the main benefit U.S Fed system in order to serve the U.S.
economy. All efficiencies with respect to just U.S. economy’s indirect aftermath world
economy. This Fed model testified certain success event ought to be applied on most of
top developed countries.
Preferences
Lynn S. Fox, Chair, Scott G. Alvarez, Sandra Braunstein, Marianne M. Emerson, Jennifer J. Johnson, Karen H. Johnson, Stephen R. Malphrus, Vincent R. Reinhart, Louise L. Roseman, Richard Spillenkothen, and David J. Stockton: Board of Governors of the Federal Reserve System. (2005). The Federal Reserve System Purposes & Functions. Board of Governors of the Federal Reserve System on behalf of the Federal Reserve System
Liu, H. C. K. (2008, June 18). Retrieved August 15, 2008, from The Strong Dollar Policy Web site: http://www.atimes.com/
Kennon, Joshua (2005). Retrieved June 30, 2005, from How They Are Determined and
How They Affect Your Portfolio
Web site: http://www.about.com/
Amadeo, Kimberly (2007).Retrieved October 10, 2007, from
The Federal Funds Rate and How It Works Web site: http://www.about.com/
Askari, H., & Krichene, N. (2008, April 18). Fed fails to learn inflation lesson. Retrieved from Fed Fails to Learn Inflation Lesson Web site: http://www.atimes.com/
Matt Stearns and McClatchy Newspapers. (2007, November 27) Retrieved from http://www.mcclatchydc.com/182.Clinton's 'fiscal responsibility' a sham
http://www.federalreserve.gov/monetarypolicy/fomc.htm
http://www.federalreserve.gov/newsevents/press/monetary/2007monetary.htm
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