Federal Reserve: The Central Bank Of The United States

Submitted By victoriabarry
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Federal Reserve
Victoria Barry
ECO 372
May 4, 2015
Godwin Quashigah

Federal Reserve
The central Bank of the United States is known as the Federal Reserve. It is characterized by a unique structure which includes twelve district banks. These bank districts all include major cities. Alaska and Hawaii are included within the twelfth district. A federal government agency who’s Board of Governors is located in Washington D.C., which was created in 1913, after a series of financial scares. Three imperative key objectives were established, they include “stable prices, maximum employment and reasonable long term interest rates (Hetzel, 2008).”
Factors in Adjusting Discount Rate
Factors that would influence the Federal Reserve in adjusting the discount rate include:
Money supply: When money supply in the economy increases, the Federal Reserve increases the discount rate to encourage more savings
Rate of borrowing: When the rate of borrowing is high the Federal Reserve increases the discount rate to discourage borrowing.
Available reserves: When the available reserves decrease, the Federal Reserve decreases the discount rate to encourage more savings.
Interest rates: This is where a decrease in interest rate would culminate into a decrease in the discount rate (Brezina, 2012).
Setting Specific Interest Rates The discount rate charged on the commercial banks by Fed for reserve lending is unavoidably less than the Federal funds rate. Therefore, the interest rate charged by commercial banks to other banks is usually higher to ensure profitability of banks. This is usually facilitated by the fact that commercial banks usually borrow from each other
When Federal Reserve increases the interest rate charged on other banks, the commercial banks increase their prime rate, which affects the rates charged on mortgages, business loans and consumer loans (Brezina, 2012).
Monetary Policy aim to avoid Inflation
In the U.S. the monetary policy is the most imperative tool for sustaining low inflation. By increasing interest rates, the aggregate demand is reduced which culminates into slow economic growth. Slow economic growth is responsible for low inflation. High interest rates lead to increased cost of borrowing, increased savings, increased value of exchange rate to reduce exports and augment imports. All these measures are destined to reduce the supply of money in the economy hence mitigating inflation (Leland, 2007).
Control Money Supply
The Federal Reserve was formulated to negate the boom-and-bust cycles of the economy by controlling money supply.
Discount rates: The Federal Reserve can also control the interest rate in charges on banks when they borrow. Lower or higher rates affect the amount of excess reserves in banks which affect their loaning capacity and hence the supply of money into the economy.
Open market operations: This is where the Federal Reserve sells and buys U.S treasury securities. The selling and buying affects the amount of excess reserves available in banks for loans to create money and hence affect the supply of money in the economy.
Reserve requirements: The Federal Reserve can also affect the proportions of reserves in banks. If the Federal Reserve reduce reserve requirements banks have a higher ability to offer loans and therefore affect money supply (Hetzel, 2008).
Stimulus Program affects the Money Supply
The stimulus program was passed by congress in 2009 to enhance employment and augment the nation’s annual economic output by approximately $400. The money multiplier affects money supply in that by increasing government expenditures which culminates to the creation of more jobs and consequently increases the supply of money. Another money multiplier that affects supply of money is infrastructure. This is because the allocation of investment towards infrastructure is more imperative to
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