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

2302 words - 9 pages

MANAGING FINANCIAL RESOURCES
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…"...

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