The Federal Reserve (Fed) has served as the United States central bank and and as the lender of last resort since September 23, 1913. It was created to address banking panics and the problems caused by bank runs. Over the past 100 years the Fed has been implementing policies and these have changed as society has become more technologically advanced. Ultimately, their purpose is to establish stability in the United States monetary policy. Which includes their goals of maximum employment, stable prices (controlling of inflation), and moderate long-term interest rates. They achieve their goals by controlling the currency in circulation, using open market operations, and ...view middle of the document...
25%. As seen on graph 1 in the appendix, the Fed has held this target rate since the global economic downturn in Aug-Sep 2008. The actions of the Fed are to keep the fed funds rate low during recessions and to increase them during an expanding economy. The Fed has felt that in the wake of the declining economy that an extremely low fed funds target rate would ease the hardship felt by the population. In addition this fed funds target rate allows the Fed to work toward their goals of price stability and controlled inflation.
In the second half of 2011, the Fed decided that the economy was not recovering at a satisfactory rate and voted to keep the fed funds target rate at 0-.25% until at least mid 2013. Towards the beginning of 2012 moderate economic growth has been seen. This information has confirmed the Fed’s intention of keeping the target rate extremely low.
Without speaking on how the Fed achieves its fed funds target rate, I will speak on why a low fed funds rate helps an economy minimize the effects of a recession. As the fed funds rate decreases banks are able to lend more money to consumers since the costs of dipping below the reserves requirement is much lower. Conversely, if the fed funds rate is increasing then banks will be more selective in lending because taking a reserves loan is much more expensive. Thus a lower fed funds rate allows banks to invest more freely and thereby allowing the economy to function more freely.
The Fed’s decision to lower their target rate to 0-.25% results in increased currency in circulation. This stimulates the economy by allowing the banks to increases loans. More loans correlates with increased spending and further achieving the Fed’s goals.
Federal Open Market Committee
Since mid 2011 the Fed has met every five to eight weeks to discuss the current state of the economy and what policies should be implemented to achieve their goals. The seven governors of the board and five presidents of the selected regional fed banks attend this meeting. This is called the Federal Open Market Committee (FOMC).
The FOMC sets the target fed funds rate and then establish plans for how they will influence the market in order to achieve that particular rate. As stated before, the current rate is 0-.25%. The FOMC cannot simply tell the world that that will be the rate. They merely influence the rate by using the monetary policy tools at their disposal.
The FOMC is decreasing the fed funds rate. They are doing this buy increasing the amount of currency in circulation. This is achieved by selling government securities over the open market. They purchase a security from a bank with cash. Now the bank has more cash and can give out more loans. Effectively, the Fed is lowering the fed funds rate because money has increased and has become cheaper.
The FOMC is currently purchasing $400 billion dollars worth of securities. This decision made in Aug 2011 is set to expire in June 2012. This action coincides with their...