Factors That Have Driven The U.S Federal Reserve's Manipulation Of Interest Rates Via The Federal Funds Rate

2302 words - 9 pages

Assignment onManaging Financial ResourcesSubmitted by:YESHWANTH RAJ PMBA - Executive Stream (Full-time)November 2006No. of words: 1998SYNOPSISThis Paper considers the factors that have driven the U.S Federal Reserve's manipulation of interest rates via the Federal Funds Rate. A change in interest rate affects the investment, consumption, government expenditure, exports and imports level in the economy. Along with it, it is seen as a tool for curing unemployment level and curbing inflationary pressures. As such, it analyses the impact of the change in interest rate on the economy and national income of the USA.The layout of the Paper is as below:The Federal Reserve System and the MaestroThe bygone Decade: Actions taken by the US Federal ReserveThe Reasoning: factors and conditionsThe Opinion / The CommentAppendix 1BibliographyThe Federal Reserve System and the MaestroThe Federal Reserve System is the Central Bank of the United States of America. It is popularly known us the 'The Federal Reserve' or simply, 'The Fed'. One of its responsibility and duty is:"Conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices"(Federal Reserve)The Fed achieves this objective through The Federal Open Markets Committee (FOMC), which oversees the open market operations. Ben S Bernanke has been recently appointed as the Chairman of the Board of Governors.Allan Greenspan was the Chairman from August 1987 to January 2006. He is credited with 'taming' the inflation, maintaining low unemployment rate and managing the crisis in the US Economy effectively. He is widely called as 'the Maestro' for his ability to rein the inflation and fuel the economic growth with conservative monetary policies. Nevertheless, the US Economy is today on a verge of another recession with a bubble that can burst into a global economic crisis; and many hold Greenspan responsible for it. (see Palley 2005, for example)The bygone Decade: Action taken by the Federal ReserveThe Federal Reserve System provides for the use of Open market Operations, Discount rates and Reserve requirements as tools of monetary policy in changing the interest rate (the federal funds rate). It is only the short-term interest rate that it can influence. The long-term interest rate is beyond the influence of monetary policy.Any change in this federal funds rate comes along with a change in the money supply and availability of credit in the economy. This, in turn, has a ripple effect on the economy and influences key economic variables like Investment, consumption, government spending, employment level, output, inflation, imports and exports."… increasing the money supply causes the interest rate to fall, which stimulates spending by consumers, firms and governments. The increase in spending leads to the familiar Keynesian multiplier process, moving the economy to a higher level of income…"...

Find Another Essay On Factors that have driven the U.S Federal Reserve's manipulation of interest rates via the Federal Funds Rate

The federal Reserve and the Beige Book: How information might affect the decision to raise interest rates.

1080 words - 4 pages chance of deflation in the U.S seemed remote. Inflation was low, but the economy was booming and the Fed had lifted short-term interest rates above 5%. Today, deflation no longer seems so remote. Fed officials and most private economists still think deflation is highly unlikely. While the Fed is expected to cut rates, that's more out of concern about slow growth, not deflation. Most Fed officials feel that the points of rate-cutting room they

The basic structure of the U.S Federal court system.

1162 words - 5 pages Outline and Briefly Explain the Federal Court SystemThe U.S. has a dual court structure. To be exact, we have a federal judiciary system and the systems that are operated by each of the states. This dual court structure is a unique feature of the American judicial system. Although most cases are tried in state courts, the federal court is playing a larger and larger role in finding resolutions to disputes. Partly, this is because congress in

The Evolution vs. Devolution of the U.S. Federal Government

2241 words - 9 pages American Government4/18/2012The Evolution vs. Devolution of the U.S. Federal GovernmentIntroductionThe extent of control the government has in the American people's lives and how well it represents those people is what sparked a revolution that gave birth to the United States, and the same debate also led a civil war that tore our country apart. As you can see this topic is one many Americans feel strongly about. These debates led to the

How have federal mandates effected the ideas of federalism?

955 words - 4 pages programs and environmental protection, while increases in the cost of Medicaid rose, leading to a national grant increase. Bill Clinton reversed the system when he signed the Executive Order 13803, which allows for federal intervention in policy matters with state and local government. Many agreed that this order seriously eroded federalism. Through out the past 25 years, the ideas of governmentgrants and mandates have varied almost from each

Role of Federal Rate in Economics

1223 words - 5 pages of gas goes down people have more money to spend. The increase in spending will be seen somewhere in the economy whether it is at the grocery store or online internet sales. Short term investments are directly influenced by the Federal Reserve rate in that if the interest rates fall too low, there will not be as much profit to be made and investors will hold on to their money until the rates improve. However, if interest rates stay too high for

The Federal Reserve and Money Supply If "taxation without representation" could rally the colonists against the British Crown in 1776, tight money and ruinous interest rates

3767 words - 15 pages out its policy directives without democratic input, accountability, or redress. Not only has the Fed's monetary restraint at times deliberately pushed the economy into deep recession, with the attendant loss of millions of jobs, but also its impact on the structure of interest rates and dollar exchange rates powerfully alters the U.S. distribution of national income and wealth. Federal Reserve shifts in policy have generated economic consequences

The Federal Reserve Bank and the Decline of the U.S. Economy

3539 words - 14 pages ability to create money, which it loans to both smaller banks, corporations, and the federal government. They control what is referred to as the discount rate, which is the interest rate that they charge on the money lent to other entities. When the Federal Reserve makes these enormous amounts of money/credit easily available, they can drive down the interest rates on them, which usually results in a lot of commercial banks purchasing these funds

U.S. Federal Reserve Monetary Policy

1298 words - 5 pages ; and (4) providing certain financial services to the U.S. government, the public, financial institutions, and foreign official institutions (Federalreserve.com).U.S. Federal Reserve Monetary Policy over the last ten years.Currently, in 2004 financial markets are going into contortions over the possibility of higher interest rates. The situation today is a lot like that of 1994 and the comparisons between 1994 and 2004 are numerous (Poloz). Over the

Describe the events and factors that propelled the development of the American West. What role did the Federal Government play in the development?

674 words - 3 pages half years and 8,000 miles later the explorers returned to St. Louis and an enormous welcome form a grateful nation. By 1848, when Mexico finally ceded its claim to all U.S. territories to the north of its present day border, the United States had acquired undisputed title to all land westward from the Rockies to the Pacific Coast, north to the 49th parallel and south to the Rio Grande. The stories that were related to them by

Violations of Laissez Faire by the U.S federal government between 1865 and 1900

728 words - 3 pages laissez faire in such a way that they had gained a strangle hold not only on their market but on the country through the merging of different trusts. This violation of laissez faire was only instituted for the good of all so that no one company could become a monopolistic force so large that it eliminated all competition. Sherman had no interest in regulating all business, just those that had swallowed the competitions for the 'purpose of

Federal Funds Should Be Used for Embryonic Stem Cell Research

1600 words - 6 pages cells is the main issue that prevents the support of many Americans for federal funding.  The question of terminating the embryo of viable offspring is a very divisive issue and will probably not be resolved in the near future, if ever.  One compromise that has been reached is that researchers only use leftover embryos from in vitro fertilization that would never have developed into a child.  During in vitro fertilization, many embryos are

Similar Essays

Summary Of The Federal Reserve's History And Policy Procedures

838 words - 3 pages from the interest it received on the discount loans. However, by the end of the 1920s, open market became the most important weapon to the Fed.Ć The Great DepressionThe stock market boomed in 1928 and 1929. In the beginning, the Fed wanted to temper the boom by raising the discount rate. However, it was reluctant to do so due to its concerns about business and individual that may have credit needs. As a result, when the Fed decided to

How Do Interest Rates Influence The Rate Of Inflation

1594 words - 6 pages the short-run aggregate supply curve. The result is an increase in the price level (see diagram). This is demand-pull inflation and may be caused by a growth in the money supply, leading to 'too much money chasing too few goods'. It is this cause of inflation which interest rates tame in order to control the rate of growth of the price level.Interest rates have a large impact on several components of aggregate demand. The transmission mechanism of

Financial Markets Notes: The Flow Of Funds And Determination Of Interest Rates

2715 words - 11 pages financing this expenditure using borrowed funds. The demand for loanable funds is viewed as being inversely related to the level of interest rates as:business demand for finance will increase at lower interest rates as it is more likely that the rate of return on real investment will exceed the cost of financehousehold demand for finance will be higher at lower interest rates, particularly for large expenditure items like housing. Loans have to be

The Invisible Government Via The Federal Reserve System

1136 words - 5 pages . The dollar index, which gauges the dollar against other major currencies, has attracted much attention recently due to its fifteen year low. A low that reflects the dollars 60% fall since 2001 (Paul, What the Price of Gold is Telling Us). The low dollar is of interest to citizens, i.e. consumers, because it means that your goods are going to cost more while your paycheck remains the same and foreign firms are buying U.S. goods and resources at