The Federal Reserve in the United States - Example

The Federal Reserve is a system that is found in United States. It can also be referred to as the central bank of United States. Research shows that this system was started in the year 1913. It is actually partly government and partly privately based. The Federal Reserve has got various functions. One of the major reasons as to why this bank was created is because it had to address any panic amongst banks in United States. The Federal Reserve also has to help in balancing among government’s centralized responsibility and banks’ private interests. (Epstein, 2003) This includes regulating and supervising the banks in United States. The Fed is also responsible for managing the monetary policy. This is in relation to the supply of money within the nation. All these are carried out to ensure that there is maximum employment, the prices are stable and the interest rates are quite moderate and long term. As illustrated, the Federal Reserve has the responsibility of maintaining and ensuring that there is maximum employment in United States. The Federal Reserve is also at the same time expected to keep inflation low in the nation. This is a very challenging task that needs skilled labour. One of the tools that the Federal Reserve uses to carry out its responsibilities is maintaining or changing the interest rates. When there are low interest rates in the market, there results in more money circulating among people. This is due to the fact that low interest rates make it very cheap for people to acquire money. This situation can lead to economic development in the nation. This is due to the fact that people tend to spend more when they get more. This means that as people get more money they will automatically look for something to purchase using that cash. Though this may indicate development, it can also lead to some multiple problems if it is not controlled. One of the possible problems is having a lot of money in circulation and very few goods in the market. This automatically results in inflation. This is due to the fact that businesses can decide to increase the prices because of the cash flow in the market. This means that even the basic goods increase in prices. The Federal Reserve alters bank rates through increasing or lowering rates of discounts and through influencing rates of federal funds. (Hafer, 2005) Discount rates refer to the rates charged on banks by the Federal Reserve when the banks borrow money on overnight basis. As this rate is increased, banks also increase their rates on borrowing and these results in less people getting loans. This means that there results in less money in the market and therefore commodities decrease in price. There are also times when Federal Reserve increases the rates charged for banks borrowing from each other. This is known as the funds rate. The results of taking this initiative are more of the same that have been discussed above. Research shows that on thirtieth of January, 2008, the Federal Reserve decided to reduce its fund’s rate by three percent. In fact a week earlier on, there had been a three quarter decrease on the same rates. In December 2007, the Federal Reserve is known to have had a quarter point reductions on the funds rate too. This means that within a span of six months there has been a five rate decrease. These changes were made after four years where the rates had been maintained. Research shows that these initiatives are not in line with the monetary policy. (Rudolf, 2006) The monetary policy, involves the central bank controlling monetary supply. It is divided into two subsets called policy of contractionary and expansionary policy. The expansionary is where unemployment is reduced through the monetary body or authority lowering the interest rates. On the other hand the contractionary policy involves increasing the interest rates. This is carried out to stop inflation in a nation. There are various issues which are considered before any expansionary or contractionary step is undertaken. These issues include unemployment, inflation and economic growth. By the Federal Reserve lowering the fed funds rates, there are some implications. This means that the rates charged on any deposits will reduce. This also includes those charged on loans from banks, credit cards and also mortgages that are adjustable. The reason as to why the Federal Reserve lowered the interest rates are due to the crisis that was in banking industry in August the year 2007. It was known as the liquidity crisis. This was when banks feared giving each other loans. This panic was addressed by the Federal Reserve through adding discount window some funds. This initiative did not make things any better. This made the Federal Reserve to reduce its interest rates. Research shows that the crisis was caused by a mess concerning mortgage. This occurred when there was a boom on real estates. There were some borrowers who were given the mortgages yet they did not qualify. They had very poor credit history. The result was that they obviously defaulted. This made the banks to go bankrupt hence resulting in panic. Research indicates that Fed funds are normally a good indicator of the economy. This also directly affects the rates of lending of a nation. The Fed funds are also important in controlling inflation and recession in a nation. The dramatic move by the Federal Reserve is bound to lead to some negative impacts unless certain measures are put in place. Among the negative impacts includes the fact that there will be an overflow of cash in the market. This will result in decrease in commodities and especially those that are so basic and frequently used. They include sugar, petrol, gas, milk, transport charges among others. When these commodities decrease, there will result a situation where the prices will increase. This can actually result in a very dramatic increase in the prices of these basic commodities. (Baylis, 2001) There is a risk in lowering the interest rates because the extent of the problem is not known. This means that the extent to which the problem of mortgage mess spread cannot be ascertained. This is due to the fact that the loans to the mortgage borrowers were made through corporate debts and even auto loans. When the Fed funds are lowered it means that the dollar value will decrease in comparison to other currencies in the global market. This means that global businesses may also incur multiple losses due to the decrease in the dollar value. This means that investors will shun away from investing in United States hence resulting in decline in the economy. Bank of England acts as the central bank of England. It is responsible for administering the monetary policy in U.K. This bank is responsible for supporting the economic policies that enhance the overall economic growth in the land. This is carried out through different approaches. It does this through influencing or adjusting the interest rates. It is part and parcel for the Bank of England to ensure that stability in the financial system in the nation is maintained. (Reis, 1995) The Bank of England is considering lowering its interest rates just as the Federal Reserve did. The reason as to why the Federal Reserve lowered its interest rates is very clear as illustrated above. Analysis is very important before this kind of a decision is made. This is in relation to the current scenario in United Kingdom and the speculated effects of lowering the interest rates. The scenario in United Kingdom shows that there is credit crunch issue. This is prompting the bank of England to lower its interest rates. Research shows that there was a forecast that the entire economy in United Kingdom would slow in the year two thousand and eight. This means that there are high chances that inflation on the other hand would increase drastically. Analysis of the scenario in United Kingdom shows that even if the interest rates were lowered by approximately a percentage point, inflation would still occur in the nation. The pound is known to have fallen against the euro. This is approximated to be by a low of four years. This means that investing in the nation would be a tricky affair. No investor ever wants to invest in a nation that is not economically stable. There are always multiple risks that are involved. In fact many investors forecasted that the interest rates in United Kingdom would certainly be reduced. (Reis, 1995) Research shows that investors always want those markets that have high rates of interests. This is due to the fact that they gain more profits from such markets than those that have low rates of interest. Analysis of the financial market in United States shows that the United States dollar was trading above the United Kingdom’s pound. Nevertheless, since the early eighties the sterling was actually trading at very high levels that are actually enviable. A look at the economy in United Kingdom shows that there is great Uncertainty. This is especially in the financial system therein. The reason behind this uncertainty is that the entire system is still quite vulnerable to many factors. These factors include the ability of the energy prices in the nation to surge. This issue is reported by analysis to be very complex in nature. There are very many worrying signs in the financial market that can actually send a chill in the spine of the concerned stakeholders. Some of the signs include the changes in prices of houses. There is however unclear explanations of the link between the way consumers spend and the general market of houses. There are also other risks that may occur in the stock market. There are chances that there can be a fall in the stock markets. This would also have adverse effects on the economy in global markets. This would mean tough times for United Kingdom’s economy since it is very clear that there are many global businesses carried out by the nation that support it financially. (Rudolf, 2006) Research in financial markets in United Kingdom indicate that the equity prices therein have been quite average. This is despite the fact that there have been multiple developments in the nation. This implies that there are negative impacts to the economy. This is especially to the global markets and it definitely needs some counterchecking by people with expertise. It is clear that the treasury cut its estimate of economic growth in the year two thousand and eight by three percent. This was also the same scenario in Bank of England’s economic growth forecast. The scenario in this nation indicates that there is bound to be increase in inflation rates in the year 2008. This is due to the fact that the prices of energy therein have already begun to increase drastically. It seems that the Bank of England had weak or feeble projections on the overall gross production in the local industries. Considering the scenario in United Kingdom, it is not very advisable for the Bank of England to follow suit to the Federal Reserve’s lowering of interest rates. This is due to the fact that there are multiple risks involved with this kind of move. It can lead to inflation and consequently adversely affecting the economy in the nation. It is also very good to put in mind that such a move can make investors shun away from investing in United Kingdom. This issue needs further research and analysis but the overall view is that it is better for the Bank of England not to lower interest rates. (Epstein, 2003) Conclusion The Federal Reserve is found in United States. This acts as a central bank in this nation. It is in charge of managing the monetary policy in U.S. The Federal Reserve is known to have lowered interest rates for various reasons. There was a liquidity crisis where banks feared lending each other money. Generally this caused also of panic to the financial sector. This prompted the Fed to add funds to the discount window. This did not work and therefore the Federal Reserve decided to lower its interest rates. The effects of lowering interest rates are quite diverse. They include inflation in the nation which leads to increase in prices of commodities. The other effect includes investors shunning away from investing in the nation due to minimal benefits that they will incur. Considering all the factors at hand, it is advisable that the Bank of England doesn’t lower its interest rates for the above factors may occur hence adversely affecting the economy. It is however very important to note that further research is required in relation to this hotly debated issue. Read More