Working with Federal Reserve's Publications - Essay Example

? Working with Federal Reserve’s Publications The central banking system of the U.S.A is the Federal Reserve System. In its latest July issue of the report on the U.S economy, the Federal Reserve states a moderate economic growth. The growth rate however, has slowed down in six districts. In the financial market, the demand for credit in the different districts has shown a mixed trend compared to the previous Beige report. The Federal Reserve has also reported that the pressure of prices in the economy has eased from that recorded before. To maintain price stability and stabilize the economy, the Federal Reserve uses the Monetary Tools of Open Market Operations, Discount Rate, Reserve Requirements, Interest on Required Reserve Balances and Excess Balances, Term-Asset-Backed Securities Loan Facility and Term Deposit Facility. Ultimately, the paper enumerates an outlook for the economy in the coming twelve to eighteen months. The Federal Reserve System is U.S.A.’s central banking system. It is also known as The Federal Reserve and sometimes informally referred to as the Fed. The enactment of the Federal Reserve Act established the Federal Reserve System in 1913. The Federal Reserve conducts the nation’s monetary policy, supervises and regulates the banking institutions, maintains the stability of the financial system and provides financial services to the Government of U.S.A, the country’s depository institutions and foreign official institutions. The Federal Reserve offers to the general public a variety of publications including the Federal Reserve Board testimonies, press releases, monetary policy reports, the Beige Book etc. which offer a detailed analysis of the current economic activity, the financial markets and the monetary policy tools used to maintain price stability and foster economic activity. Federal Reserve’s assessment of the current economic activity and financial markets According to the Federal Reserve Beige Book of July 2011, economic activity in the twelve districts of the U.S.A continued to grow. However, in many districts the rate of growth has been moderate than that reported before. Overall assessment of consumer spending indicated an increase and a majority of the districts reported a humble increase in the non-auto retail sales. Auto sale slowed down compared to the previous Beige Book report and the disruptions in the Japanese supply chain caused the auto inventories to remain lean. The retail margins continued to be squeezed under pressure in prices from ‘food, energy, cotton, and other supplier inputs’. The Federal Reserve presumes that a decrease in the gasoline prices could have provided an impetus to shopping trips and other additional spending. The summer flavor of tourism had initiated better performance than last year in most of the areas. In most of the districts, activity in the non-financial service sectors reported a growth overall. Manufacturing activity also increased overall in the districts. Firms generally retained their optimistic manufacturing outlook, but were cautious regarding their capital spending strategy. Activity in the residential real estate market remained weak although construction as well as movement in the residential rental sphere improved from before. The agricultural sector in seven districts (which reported on the sector) was unfavorably affected by both drought and extreme flood conditions. However, the energy and mining sectors in the districts which reported on these sectors recorded a robust growth for majority of energy-related products. The production of coal was sluggish. The labor market conditions in the U.S economy remained moderate and most of the districts reported modest increases in the hiring of labor. (The Federal Reserve, July 2011, p. 4, 5) In the financial market, the Federal Reserve reported a mixed loan demand from the districts in comparison to the previous report. Total increase in loan demand was recorded in the New York, Chicago and Richmond districts although they originated from different sources. The St. Louis and the Kansas City districts reported a decrease in their overall loan volume. There was little alteration in volume of loan of the Philadelphia, San Fransisco and Dallas districts while mixed results in the same were recorded in the Atlanta and Cleveland districts. Credit conditions have generally remained the same as before. According to the banks of the New York, Richmond, Cleveland, Chicago and Dallas districts, the credit quality mostly remained flat and sometimes was improved. The bankers in the Richmond, Chicago, Atlanta, Dallas and San Fransisco districts have reported that due to the competition among the credit lenders for securing high-quality lenders, the bank’s margins were being squeezed and the cost of capital for those borrowers were being lowered. The New York, Atlanta, Chicago and Kansas Coty bank contacts noted that the credit standards remained the same at tight levels. However, Cleveland district reported some cases where the credit standards were eased for the good borrowers. (The Federal Reserve, July 2011 p 10, 11) Federal Reserve’s current view about Inflation In its Beige Book of July 2011, the Federal Reserve reports that the pressure of prices in the U.S economy have moderated from that recorded before. The pressures of input prices were also noted to have fallen. However, in the Philadelphia, Minneapolis, Chicago and Kansas City districts increases in input prices remained at a high level. On the other hand, the districts of Boston, Cleveland, Atlanta and San Fransisco reported that input price pressures had moderated from before. The Federal Reserve also reported that the ability of the firms to pass on such price increases to their customers were still existent but in a mixed pattern. For example, firms belonging to the Chicago district’s retail sector and Dallas district’s service sector could pass on the effects of some rising prices. It was also recorded that the pressure in prices of food, cotton, energy and other supplier inputs continuously compressed the retail margins. (The Federal Reserve, July 2011, p 13) Monetary Policy Tools the Federal Reserve uses to stabilize the economy and maintain price stability The Monetary Policy Tools that the Federal Reserve uses to stabilize the economy and maintain price stability include Open Market Operations, the Discount Rate, Reserve Requirements, Interest on Required Reserve Balances and Excess Balances, Term-asset backed security Loan Facility and Term Deposit Facility The Open Market Operations This is the Federal Reserve’s main tool for implementing the Monetary Policy under which the Fed buys and sells U.S Treasury Securities and federal agency securities in the market. The Federal Open Market Committee specifies the short-term goal of the open market operations which can be to acquire a specific quantity of reserves or a desired price. This desired price is the federal funds rate. Depository institutions lend balances overnight to other depository institutions at the Federal Reserve at the interest rate which is the federal funds rate. The objective of the Federal Reserve for conducting open market operations has differed over the years. (Board of Governors of the Federal Reserve System 2010) The Discount Rate The lending provision of the regional Federal Reserve Bank is called the discount window. The interest rate at which the commercial banks and other depository agencies borrow loans from the discount window is the discount rate. The loans offered here are completely tenable. Three loan programs, each with a different interest rate, are offered to the depository institutions by the Federal Reserve Banks through their discount window: the primary credit, the secondary credit and the seasonal credit. The discount rate for primary credit is fixed above the general short-term market rates of interest. The discount rate applied to secondary credit is determined above that of primary credit. A mean of selected market interest rates estimates the ‘discount rate for seasonal credit’. The Board of Directors of each Reserve Bank proposes the discount rates which are partially determined by the Federal Reserve’s Board of Governors. By altering the discount rate as per requirements, the Federal Reserve can influence the Monetary Policy of the economy. (Board of Governors of the Federal Reserve System 2011) Reserve Requirements The depository institutions are required to possess a specific volume of finance in reserve against specific deposit liabilities. These are known as reserve requirements which are held by the depository institutions in the nature of vault cash or deposits with the Federal Reserve Banks. Only the Board of Governors of the Federal Reserve has the power to make changes in the reserve requirements. In an inflationary situation, when the money supply circulating in the economy need to controlled, the Federal Reserve usually increases the reserve requirements. As the commercial banks are then compelled to hold a higher amount of its assets as reserves, they are left with comparatively less amount of funds to be given as loans. Thus the credit supply is checked and the money circulating in the economy also decreases. (Board of Governors of the Federal Reserve System 2010) Interest on Required Reserve Balances and Excess Balances Starting from October 2008, the Federal Reserve banks started paying interest on the required reserve balances and the excess balances. Balances held by the commercial banks which are excess of their required reserve balances along with contractual clearing balances are known as excess balances. The Federal Reserve Board also determines the interest rate paid on excess balances which provide the Fed with an additional tool for conducting the monetary policy. When the Federal Reserve wants to control the money circulating in the economy it usually increases the interest paid on the required reserves and the excess reserves. Thus the commercial banks are inclined to hold more of their funds as excess reserves. This leaves them with fewer funds to lend out as credit. Thus the loan supply decreases in the economy which in turn decreases the money supply. (Board of Governors of the Federal Reserve System 2011) Term Assets-Backed Securities Loan Facility (TALF) Under the TALF, The Federal Reserve Bank of New York lends on a non-recourse basis upto $200 billion to holder of specific AAA-rated asset backed securities (ABS) supported by new consumer loans and small business loans. An amount equal to the ABS market value less a haircut will be lent by the Bank and will remain secured always by the ABS. Under the Troubled Assets Relief Program (TARP) of the Emergency Economic Stabilization Act of 2008, the U.S Treasury is compelled to provide credit protection of $20 billion to the Federal Reserve Bank of New York under the TALF (Board of Governors of the Federal Reserve System 2011) Term Deposit Facility The regional Federal Reserve Banks offer the term deposits under the TDF and the depository institutions that are eligible for receiving earnings on their balances from the Reserve Banks can participate in this program. By the Term Deposit Facility, the Federal Reserve can manage the total amount of reserve balances which the depository institutions hold. The term deposit funds are taken away from the accounts of the depository institutions for the entire period of the term deposit. Thus the reserve balances of the banking system are drained which contracts the supply of credit in the economy. Accordingly, the money supply also decreases. (Board of Governors of the Federal Reserve System 2011) Economic outlook for the next twelve to eighteen months Economic activity can be predicted to continue on its growth path in the coming twelve to eighteen months. However, the rate of growth will be lower than that recorded before. The growth rate has been reported to be slowing down over the past few months. Manufacturing activity has recorded expansion since the past months and manufacturing firms have an optimistic outlook about the future of the business. Under such circumstances, manufacturing activity is expected to continue its growth in the coming months. However, the firms are cautious about their capital spending plans and therefore the coming year may not witness any major capital being acquired by these firms. Auto sales have slowed down from the past months and it is expected to continue to do so until the bottlenecks in the Japanese auto supply chain are cleared. Once the disruptions are over, the auto inventories will also increase and this would facilitate the auto sale. In the context of prices, there has been the pressure of prices of commodities like food, cotton, energy and other supplier inputs which have resulted in the squeezing of retail margin of sales. This trend is likely to continue in the coming months also. Concluding remarks The coming twelve months is expected to see a prosperous summer tourism season since it has already started off on a stronger note than that of last year. The tourist visits in most of the holiday destinations this year have been unaffected by the severe cold weather. Summarizing, it can be said that economic activity will continue to prosper in the coming months helped by the manufacturing and transportation sectors. However, the automobile sales could take some time to revive being dependant on the Japanese supply chain. The pressure of prices on items like food, energy and supply inputs is expected to remain in the coming months, though it has moderated from before. References Board of Governors of the Federal Reserve System (2010) Open Market Operations retrieved on August 19, 2011 from http://www.federalreserve.gov/monetarypolicy/openmarket.htm Board of Governors of the Federal Reserve System (2011) The Discount Rate retrieved on August 19, 2011 from http://www.federalreserve.gov/monetarypolicy/discountrate.htm Board of Governors of the Federal Reserve System (2010) Reserve Requirements retrieved on August 19, 2011 from http://www.federalreserve.gov/monetarypolicy/reservereq.htm Board of Governors of the Federal Reserve System (2011) Interest on Required Balances and Excess Balances retrieved on August 19, 2011 from http://www.federalreserve.gov/monetarypolicy/reqresbalances.htm Board of Governors of the Federal Reserve System (2011) Term Asset-Backed Securities Loan Facility retrieved on August 19, 2011 from http://www.federalreserve.gov/monetarypolicy/talf.htm Board of Governors of the Federal Reserve System (2011) Term Deposit Facility retrieved on August 19,2011 from http://www.federalreserve.gov/monetarypolicy/tdf.htm Federal Reserve District (July 2011) Summary of Commentary on Current Economic Conditions retrieved on August 19,2011 from http://www.federalreserve.gov/fomc/beigebook/2011/20110727/fullreport20110727.pdf Federal Reserve District (May 2011) Summary of Commentary on Current Economic Conditions retrieved on August 19,2011 from http://www.federalreserve.gov/fomc/beigebook/2011/20110608/fullreport20110608.pdf Read More