FEDERAL RESERVE PRESENTATION

1. FEDERAL RESERVE PRESENTATION

2. INTRODUCTION The central Bank of the United States is known as the Federal Reserve. It is characterized by a unique structure which includes 12 Reserve regional banks and a federal government agency who’s Board of Governors is located in Washington D.C. It was created in 1913 after a series of financial panics and in particular that of 1907. Three imperative key objectives were established, they include stable prices, maximum employment and reasonable long term interest rates. (Hetzel, 2008)

3. Factors that would influence the Federal Reserve in adjusting the discount rate Money supply: when the 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 decreases, the Federal Reserve decreases the discount rate to encourage more savings. Interest rates: a decrease in interest rate would culminate into a decrease in the discount rate. (Brezina, 2012)

4. How does the discount rate affect the decisions of banks in setting their 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)

5. How does 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)

6. How does monetary policy control the 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)

7. How does a stimulus program (through the money multiplier) affect 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 increase 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 the community that to a particular company. This is because it leads to augmented investments and therefore increased money supply to the economy. In addition, when an individual deposits money in the bank, the money is lend out to a borrower at a higher rate than that of savings hence the reserve ratio of the bank increases which I n turn increases lending and consequently increased money supply. (Hetzel, 2008)

8. Currently, what indictors are evident that there is too much or too little money within the economy There is too much money in the economy as evidenced by inflation This is shown by the increased prices of goods and services because of the higher supply of money. The government has increased deficits and debts which has led to the printing of more money to cover the traceable deficits. (Leland, 2007)

9. How is monetary policy aiming to adjust this? The monetary policy aims at adjusting this by reducing money supply in the economy. This can be achieved by the Federal Reserve increasing the rate of interest to encourage savings. Open market operations: The Federal Reserve is planning on selling budget securities to reduce the amount of money in the economy. Discount rates: the Federal Reserve is planning on increasing interest rates to discourage commercial banks from borrowing hence they will have less money to loan out to customers Reserve requirements: the Federal Reserve should increase the reserve requirements of commercial banks to ensure that banks are left with less amount of money to lend out to customers. (Leland, 2007)

10. Conclusion • In conclusion, the Federal Reserve has been effective in regulating money supply. • Therefore investments in the U.S. have a high probability of thriving because the Federal Reserve has the ability to control inflation through • Open market operations • Discount rates • Reserve requirements

11. Reference Brezina, C., (2012). Understanding the Federal Reserve and monetary policy. New York: Rosen Pub., 2012 Hetzel, R. L., (2008). The monetary policy of the Federal Reserve: a history. Cambridge [u.a.]: Cambridge Univ. Press, 2008. Leland, G., (2007). Making monetary and fiscal policy. Bach. Washington: Brookings Institution