The Power of the Federal Reserve Bank - Federal Funds and Discount Rates
The Federal Reserve Bank is an incredibly powerful institution that most Americans didn't even know existed. Well, that was the case until the economy090-056 went haywire in 2008. While everyone knows of the "Fed" now, few understand how it influences the economy.
The Fed has been a powerful entity in the United States for a very long time. Why? It sets much of the real monetary policy of the country. Whereas Congress and the President are often touted as being economic forces, and they are, the Fed can have an even bigger impact. For instance, there has been much debate about the $700 billion dollar bank bailout plan. While this was going on, the Fed put nearly 7 trillion dollars into the market without a peep from anyone!
Traditionally, the Federal Reserve Bank has influenced the economy not by putting money into the financial markets, but by controlling the rates that are charged for financial institutions to borrow money. The two key rates the Fed manipulates are the Federal Funds and Discount Rates.
The Federal Fund Rate is the interest rate a bank can charge another bank to borrow money overnight. The obvious question is why would one bank borrow from another? It has to do with reserves. The Fed sets reserve amounts that banks must comply with. This simply means that they have to have a certain amount of money on hand. Banks with excessive amounts will make loans to banks that are short on cash. When the Fed wishes to slow the economy down, it raises the reserve requirement and rate. This cost is passed through to bank customers and090-076 there tends to be less borrowing. This is uses to slow down excessive economic growth and inflation.
The Discount Rate is the interest rate charged when banks borrow directly from one of the Federal Reserve Banks on an overnight basis. The Fed manipulates the interest rate up and down. It pushes the rate up to make it hard to borrow money which ultimately slows down economic development and keeps prices under control. When the economy needs to be fired up, the Fed pulls the interest rate down. The current economic situation is so bleak that the Fed has actually reduced the interest rate to as close to zero as it can get. This means that banks can borrow from the Fed for free! That's how worried the Fed is about getting through this economic meltdown.
The Federal Reserve Bank has long flown under the radar as far as most090-077 Americans are concerned. Those days are obviously over. The Fed has stepped into the middle of things and done what it can to keep a bad economic situation from turning into a total disaster.
The Fed has been a powerful entity in the United States for a very long time. Why? It sets much of the real monetary policy of the country. Whereas Congress and the President are often touted as being economic forces, and they are, the Fed can have an even bigger impact. For instance, there has been much debate about the $700 billion dollar bank bailout plan. While this was going on, the Fed put nearly 7 trillion dollars into the market without a peep from anyone!
Traditionally, the Federal Reserve Bank has influenced the economy not by putting money into the financial markets, but by controlling the rates that are charged for financial institutions to borrow money. The two key rates the Fed manipulates are the Federal Funds and Discount Rates.
The Federal Fund Rate is the interest rate a bank can charge another bank to borrow money overnight. The obvious question is why would one bank borrow from another? It has to do with reserves. The Fed sets reserve amounts that banks must comply with. This simply means that they have to have a certain amount of money on hand. Banks with excessive amounts will make loans to banks that are short on cash. When the Fed wishes to slow the economy down, it raises the reserve requirement and rate. This cost is passed through to bank customers and090-076 there tends to be less borrowing. This is uses to slow down excessive economic growth and inflation.
The Discount Rate is the interest rate charged when banks borrow directly from one of the Federal Reserve Banks on an overnight basis. The Fed manipulates the interest rate up and down. It pushes the rate up to make it hard to borrow money which ultimately slows down economic development and keeps prices under control. When the economy needs to be fired up, the Fed pulls the interest rate down. The current economic situation is so bleak that the Fed has actually reduced the interest rate to as close to zero as it can get. This means that banks can borrow from the Fed for free! That's how worried the Fed is about getting through this economic meltdown.
The Federal Reserve Bank has long flown under the radar as far as most090-077 Americans are concerned. Those days are obviously over. The Fed has stepped into the middle of things and done what it can to keep a bad economic situation from turning into a total disaster.
|
|
