...government has to control the supply of money is the monetary policy. This policy recommended to the president of the United States by the Federal Reserve Board by using tools to control the supply of money. Tools used to control the supply of money by the Federal Reserve Board are open-market operations, the reserve ratio, and the discount rate. This paper explains how the Federal Reserve Board uses these tools to control the supply of money, explains how the tools influence the money supply and macroeconomic factors, how money is created, and recommended monetary policy. The Federal Reserve Board A series of bank failures resulted in a severe financial panic in 1907 and millions of depositors lost their savings. Consequently, the National Monetary Commission was established to examine ways of restructuring the banking system to ensure that history does not repeat itself (Economics 180, 2009). To address the problem of restructuring, the Congress passed the Federal Reserve Act in 1913 (FRB: Federal Reserve Act, 2008). There are 12 Federal Reserve banks that act as a central banker for the banks in their region, which perform clearing checks between private banks, holding bank reserves, providing currency, and providing loans. The Federal Reserve Board is controlled by a seven person Board of Governors in which each governor is appointed to a 14-year term by the president of the United States. The long-term is intended to provide the Federal Reserve Board a strong and...
Words: 1528 - Pages: 7
...Federal Reserve Presentation Federal Reserve Presentation 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). Factors that would influence the Federal Reserve in adjusting the 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). 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....
Words: 963 - Pages: 4
...presentation of the Federal Reserve. I am going to discuss Discount Rates set by the Federal Reserve and how this affects the supply of money and decisions made by banks on borrowing. I will explain the Monetary Policy used by the Fed to control the supply of money and how these aim to avoid inflation. I will explain how the infusion of stimulus programs affects the supply of money. I will also describe the current indicators that show there is too little or too much money in the economy today and what steps are being taken to correct this. The current state of the economy and the demand for money are factors that influence the Federal Reserve to adjust the discount rate. Banks request additional money when their reserves get low. Changes in real estate become a factor when homeowners are unable to pay their mortgages and banks lose money. The Federal Reserve decreased interest rates for the real estate market, which made it less expensive for banks to borrow funds. “A change in the credit supply and demand influenced the Federal Reserve to increase the discount rate, discouraging banks from requesting money by making it more expensive for banks to borrow funds, (Colander, 2010)”. The Feds use the spread between the Discount Rate and the Federal Funds Rate to increase or decrease the supply of money. If the Discount Rate is lower than the Federal Funds Rate, banks will borrow from other bank which does not increase the supply of money. When the Federal Funds Rate is lower...
Words: 934 - Pages: 4
...* What are the factors that would influence the Federal Reserve in adjusting the discount rate? * The amount of money that is in the reserve determines the discount rate. The quantity of loanable funds supplied must equal the quantity of loanable funds demanded. The discount rate is an implemented rate set by the Federal Reserve (Thornton, n.d.). The discount rate is the interest rate that the Federal Reserve lends to reserve depositories such as Wells Fargo or Chase Morgan. Each depository has a set of reserve requirements. These loans from the Federal Reserve enable them to meet these requirements. An increase in the discount rate means a decrease in the money supply and a decrease in the discount rate means an increase in the money supply. The discount rate is used to influence the economy. The discount rate is used to stimulate the economy. It helps to stop inflation or to increase spending, depending on the current health of the economy. * * * How does the discount rate affect the decisions of banks in setting their specific interest rates? * Since the discount rate controls the amount of money in the reserve it also affects interest rates on loans in the loanable funds market. A lower discount rate means more money supply which also means a lower interest rate. A high discount the rate equals a lower money supply and a higher interest rate. These all control the health of the economy. Interest rates are the prices that are charged or paid for the use...
Words: 1094 - Pages: 5
...Federal Reserve Marian Holmes ECO/372 March 12, 2013 Robert D'Alessio Federal Reserve The Federal Reserve is an independent central bank, and it is the third central banking system in the United States’ history. The first banking system was The First Bank of the United States and the second banking system was the Second Bank of the United States. The Federal Reserve is unique in many ways, controlling, and over-seeing currency in the United States. To receive a better overstanding of the Federal Reserve System and how it works, the following questions will be topics of discussion: * What are the factors that would influence the Federal Reserve in adjusting the discount rate? * How does the discount rate affect the decisions of banks in setting their specific interest rates? * How does monetary policy aim to avoid inflation? * How does monetary policy control the money supply? * How does a stimulus program (through the money multiplier) affect the money supply? Currently, what indictors are evident that there is too much or too little money within the economy? How is monetary policy aiming to adjust this? The Discount Rate is the interest rate that the Federal Reserve Banks charge depository institutions on overnight loans. Factors that would influence the Federal Reserve in adjusting the discount rate are an increase or decrease in money supply, or if they foresee the economy heading to a recession or inflation. Banks decisions are affected by...
Words: 624 - Pages: 3
...What is the Federal Reserve? The Federal Reserve is the main bank of the United States government. The Federal Reserve is also the same bank that governs all other banking institutions in the United States. The Federal Reserve consists of 12 banking districts and is run by a Board of Governors. The Federal Reserve bank was created by the United States Congress in December of 1913. The Federal Reserve has some very important responsibilities which include adjusting monetary policy, price stabilization, monitoring and controlling inflation, and maintaining low interest rates to encourage economic growth. Aside from these very important responsibilities the Federal Reserve also acts as a financial institution for the United States government as well as central banks to foreign countries. The Federal Reserve is also responsible for ensuring adequate research is conducted on both the United States economy as well as the individual regions within the United States. They also take up the responsibility of educating people on what they do and how they do it through many different channels of media, such as: speeches, publications, web sites, and educational seminars. What are the factors that would influence the Federal Reserve in adjusting the discount rate? When it comes to the Federal Reserve adjusting the discount rate there are a few factors that play an influential role. The current state of the economy and the direction that the economy is moving are the...
Words: 1814 - Pages: 8
...Federal Reserve Banks operate under the general supervision of the Board of Governors in Washington. Each Bank has a nine-member Board of Directors that oversees its operations. Federal Reserve Banks generate their own income, primarily from interest earned on government securities that are acquired in the course of Federal Reserve monetary policy actions. A secondary source of income is derived from the provision of priced services to depository institutions, as required by the Monetary Control Act of 1980. Federal Reserve Banks are not, however, operated for a profit, and each year they return to the U.S. Treasury all earnings in excess of Federal Reserve operating and other expenses. 1. What are the factors that would influence the federal reserve in adjusting the discount rate? The Federal Reserve extends discount window credit to depository institutions under the primary, secondary, and seasonal credit programs. The rates charged on loans under each of these programs are established by each Reserve Bank’s board of directors every two weeks, subject to review and determination by the Board of Governors. The rates for each of the three lending programs are the same at all Reserve Banks, except occasionally for very brief periods following the Board’s action to adopt a requested rate change. The Federal Reserve also has the authority under the Federal Reserve Act to extend credit to entities that are not depository institutions in “unusual and exigent...
Words: 890 - Pages: 4
...Federal Reserve paper Julio L. Aguilera ECO/372 October 17, 2012 Charles Meyers Federal Reserve paper The author of this paper will be providing you the reader with information on the United States Federal Reserve so that you have a better understanding of it and how they operate. With the information provided from the author’s research hopefully you the official will make the decision of doing business with United States Federal Reserve system after you read this paper. This paper will cover the following: what are the factors that would influence the Federal Reserve and adjusting the discount rate, how the federal funds rate affect the decisions of banks in setting their specific interest-rate, how monetary policy aims to avoid inflation and control money supply, and last but not least what indicators are evident that there is too much or too little money within the economy and how monetary policy is aiming to adjust this problem. The Federal Reserve System is the United States Central banking system which was created on December 23, 1913. Federal Reserve System was created due to financial turmoil that was occurring in early 1900's. One example of financial turmoil the nation experienced was the Great Depression which resulted in the Federal Reserve making changes to their system. The members of the Board of Governors are nominated by the President of the United States and confirmed by the U.S. Senate. By law, the appointments must yield a "fair representation...
Words: 857 - Pages: 4
...What is the U.S. Federal Reserve System? Known as the “the Fed” or “Federal Reserve” Created in 1913 by the Congress Serves as the U.S. central bank Provides a secure, more stable, & flexible monetary and financial system Supervises/regulates banking institutions Structure of the Fed Two-part structure: - Board of Governors - Network with 12 Federal Reserve Banks Board of Governors and presidents of the Reserve Banks make monetary policy Board of Governors Government agency overlooks the Fed Located in Washington Seven-member Board appointed by the President and Senate serving 14-year terms appointed for long terms Shielded from political pressures Presidents of Reserve Banks 12 regional Federal Reserve Banks Also known as “district banks Nongovernmental organizations, with the publics interest on mind In San Francisco, Boston, New York, Philadelphia, Richmond, Atlanta, Cleveland, Kansas City, Dallas, Minneapolis, St. Louis, and Chicago Each of their branches have a board of directors Factors influencing discount rate Discount rate: interest rate charged to commercial banks/depository institutions on loans received from the Fed Factors: printing and lending it out money, consumer savings goes down, government borrows money the demand will go up and the interest rate will increase Supply ↑ then interest rates ↓ Demand ↑ then interest rates ↑ How does the discount rate affect the decisions of banks in setting their specific...
Words: 396 - Pages: 2
...Federal Reserve Banks ECO/372 September 10, 2012 The Federal Reserve Banks operate in the United States under the supervision of the Board of Governors in Washington. Each bank consists of board members who work with operations. The Federal Reserve Bank generates income from interest earned on government securities. The monetary policy generates income. The other form of income is comes from the Monetary Control Act of 1980. The act requires a price of services to depository institutions. The Federal Reserve does not operate for profits and the United States treasury receives earnings on a yearly basis. The Federal Reserve sets the baseline or the average for the interest rates. This is what other banks base their interest rates. The Federal Reserve can inject and take money out of the system because they responsible for printing the money. By injecting the money into the system, creates a discount rate. According to Businessdictionary.com (2012), An interest rate that is one of two that the Fed directly sets, whereby Federal Reserve member banks can receive funds via the Fed. Can also be referred to simply as the discount rate. The other rate set by the Federal Reserve Bank is known as the Federal funds rate. When more cash is in circulation, consumer’s interest rates get lowered, making borrow money easier for consumers. The economy has a major influence over how banks lend money and the interest rates get set. When the...
Words: 1117 - Pages: 5
...Federal Reserve Paper Elias Bettencourt ECO/372 Charles Meyers The Federal System is a banking system of the United States. The Federal Reserve is accountable for the sum of currency and credit in the economy. The Fed can be looked at as like a gatekeeper of the U.S. economy. It is the most powerful organizations on this earth because it watches over the world’s largest economy. Reserves are the credits that a bank contains at the Federal Reserve Bank as well as its money on hand. The key points to hit on are how does the federal funds rate affect the decisions of banks in setting their specific interest rates? How is the federal funds rate changed? How does monetary policy aim to avoid inflation? How does monetary policy control the money supply? As well as what indicators are evident that there is too much or too little money within the economy? The Federal Reserve is trying to keep up with a healthy economy and if the economy gets slow the Fed will make a decision to lower the interest rate in hopes that it will make more money available to businesses, households, and consumers. Many consumer interest rates are influenced by changes made up of the Fed. The part of choosing particular interest rates is the responsibility to the Federal Reserve Board. As the Federal Reserve increases or drops temporary interest rates, banks may increase or decrease the interest rates they charge debtors, together with the main rate. The monetary policy relies on the connection among...
Words: 717 - Pages: 3
...-The Federal Reserve’s control of money supply, Federal Reserve’s influence on interest rates, and the treasury department Andrew Jackson once stated “The bold effort the present (central) bank had made to control the government ... are but premonitions of the fate that await the American people should they be deluded into a perpetuation of this institution or the establishment of another like it.” (http://quotes.liberty-tree.ca/quotes_by/andrew+jackson). Since the Federal Reserve was established in 1914, the amount of power it has acquired over time has become very substantial. The Federal Reserve has a large control over the supply of money within the country, the Federal Reserve can control the flow of money in and out of the government, this is all because the fed controls the monetary base. There are two types of economist Monetarist Economists and Keynesian economists, In the following paragraph I will explain what the difference between these two types of economist are and how they believe the Fed controls the money supply. Not only does the Fed have a large influence on the money supply within the economy. The Federal Reserve also has a tremendous amount of power over the interest rates that are being used in today’s economy. Many of the ways that money supply can be altered can also heavily affect the feds fund rate in a predictable manner, the Federal Reserve uses that to their advantage even though they cannot set a rate for the Fed funds rate, they can hold it around...
Words: 2760 - Pages: 12
...The Federal Reserve acquires its unique powers through its ability to issue money. Open your wallet or your purse and take a look at some bills. At the top, you will see the words “Federal Reserve Note.” In the past, many banks issued their own bank notes, which were used as money. But today the money we use in the United States is provided by just one bank, the Federal Reserve. Thus, the Federal Reserve has the power to create money—an awesome power that forms the centerpiece of this chapter. The Fed doesn’t have to literally print money. It can, as we shall see in more depth later in this chapter, also create money “by computer” by adding reserves to bank accounts held at the Fed. This new money can be given away or lent out in a way that increases aggregate demand. If the Federal Reserve is a bank, who are its customers? The Fed is both the government’s bank and the banker’s bank. As the government’s bank, the Fed maintains the bank account of the U.S. Treasury. When you write a check to the IRS to pay your taxes, the money ends up in the Treasury’s account at the Fed. In addition to receiving money, the U.S. Treasury also borrows a lot of money and the Fed manages this borrowing—that is, the Fed manages the issuing, transferring, and redeeming of U.S. Treasury bonds, bills, and notes. Since the U.S. Treasury is by far the world’s largest bank customer—it has more income and it also borrows more than any other bank customer—the Federal Reserve is a large and powerful bank...
Words: 9471 - Pages: 38
...The Federal Reserve Jermaine C. Taylor ECO320 Money & Banking March 2, 2014 Prof. Diana Bonina, Ph.D. Strayer University The Federal Reserve established on December 23, 1913 when President Woodrow Wilson signed the Federal Reserve Act into law. Although started in 1913, actual operations of the Reserve began in 1914. In order to provide the country with a safer financial system, Congress created The Federal Reserve System as the central bank of the United States. Today, the Federal Reserve’s responsibility falls into four general areas: conducting the nation’s monetary policy; supervising, regulating and other soundness of the country’s financial system; maintaining the stability of the financial system and providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions. The Federal Reserve can use the following tools to influence the money supply: Open Market Operations, The Required-Reserve Ratio and Discount Rate. The Federal Reserve uses Open Market Operations as its primary tool to influence the supply of bank reserves. This tool consists of Federal Reserve purchases and sales of financial instruments, usually securities issued by the U.S. Treasury, Federal agencies and government-sponsored enterprises. Using Open Market Operations, Federal Reserve can affect the money supply by buying or selling the U.S. government securities. When the Federal Reserve purchases a government security from the public...
Words: 2264 - Pages: 10
...372 Week 4 Federal Reserve System Presentation WHAT ARE THE FACTORS THAT WOULD INFLUENCE THE FEDERAL RESERVE IN ADJUSTING THE DISCOUNT RATE? Weak Economy. Low Employment Levels. High Prices Fluctuation. Low Economy Production Capacity. High Federal Funds Rates. HOW DOES THE DISCOUNT RATE AFFECT THE DECISIONS OF BANKS IN SETTING THEIR SPECIFIC INTEREST RATES? Lower Discount Rates: 1. Banks borrow more reserves 2. Increase in loan offers. 3. Lower interest rates . Increase Discount Rates: 1. Bank reserve decrease. 2. Fewer loans offers. 3. Higher interest rates. How does monetary policy aim to avoid inflation? Contractionary monetary policy: Selling of U.S. Treasury Securities-Open Market Operations. Increase in the Discount Rate. Increase in Reserve Requirements. Control Money Creation. Increase in Government Spending. Decrease in Taxes. FED CONTROLLING MONEY SUPPLY How does monetary policy control the money supply? •With more money, aggregate expenditures are greater. Low interest rates: Investment expenditures. Government purchases. Net exports Consumption expenditures. HOW DOES MONETARY POLICY CONTROL THE MONEY SUPPLY? With less money, aggregate expenditures are lower. •High interest rates: Investment expenditures decrease . Government spending stops. Net exports Consumption expenditures. Decrease. HOW DOES A STIMULUS PROGRAM (THROUGH THE MONEY MULTIPLIER)...
Words: 333 - Pages: 2
