Fed Fund Rate of the Economic Crisis - Essay Example

This is justified by the easier recovery of a service-based economy than the manufacture-oriented one.

The Fed fund rate averaged at 7.10% during the 1970s, 9.97% during the 1980s, 5.15% during the 1990s, and 3.25% during the 2000-2007. The huge differences in the means of Fed fund rates can be explained by the differences in economic and monetary policies adhered to by the different chairmen of the Federal Reserve.

The Fed fund rate reached its maximum during January 1981 at 19.08% which is during the administration of Paul Volcker. Compared to the other Federal Reserve chairman, Volcker has been reputed as an inflation hawk who is more concerned with fighting inflation compared to a dove whose main concern is unemployment. This perception requires him to set the Fed fund rate at higher levels to fight stagflation.

The Fed fund rate is lowest during December 2003 at 0.98% due to the strong performance of the US economy. This period saw the strongest economic development in the economy in nearly two decades. It can be recalled that during this period, the inflation-targeting monetary policy has been adopted by the US.

The Federal fund rate and ten-year Treasury bill rates tend to move apart as shown in the graph above. It should be noted that increases in Fed fund rates are simultaneous with declines in ten-year Treasury bill rates.

The Federal Reserve solely influences the level of the Fed fund rate. It should be noted that this is set during Federal Open Market Committee meetings depending on the agenda and economic situation of the United States.

The ten-year Treasury bill rate is set by different variables in the economy like the real interest rates and inflation. The Fed can indirectly influence T-bill rates by affecting the monetary variables mentioned above. Read More