...Concerns of Federal Reserve Raising Interest Rates Sharon Cordero Post University Abstract In the midst of a struggling economy were food and energy prices are rising and long-term US Treasury yields approached their highest levels since the start of the year, concerns about higher inflation, have compelled investors to scale back their buying of long-dated Treasuries and European government bonds. As rates rise, the present values of home prices will fall, creating less “equity” for homeowners. Therefore, consumers will be less willing and less able to buy. The Fed tries to indirectly influence other interest rates (especially the federal funds rate) by buying or selling U.S. Securities on a large scale. They do this by buying bonds in mass quantities. Concerns Over Raising Interest Rates The Federal Reserve is the central bank of the United States, created by an act of Congress in 1913. The Federal Reserve sets and enforces the specific legal reserve requirements. There are several well-known types of lending interest rates that the federal reserve and banks charge to banks and consumers and which affect the interest rates that we have to pay for autos or mortgage loans. The discount rate is the rate that the Federal Reserve Bank charges to banks and other financial institutions to borrow short-term funds directly from the central bank. (Heyne, 352) The discount rate affects the rates these financial institutions...
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...English 1020 25 March 2010 Independence From Politics: The Federal Reserve Ever since the dawn of civilization, possessing control over others has been the ultimate want for every man. Dating back to the early Greek empire, there has been two ways to obtain this empowerment; Holding a respective position in the states politics and possessing the power to control currency. If one holds a respective position in politics, he or she has the power to control people by using the law and special influences through mutual favors. If one has the power in influence the states currency, he or she has the power to control the economy and the entire well-being of the nation (Greider 23). If one single individual or entity possessed both of the influences, they would be in one-hundred percent control of the nation. The same situation is an ever-looming problem here in the United States. For years, politicians have tried to get an inside edge on the nonpartisan Federal Reserve System. As B.E. Roberts, a well-respected economist proclaims, “Congress has attempted, particularly in the mid-1970’s, to use such devices to exert influence. The question is whether or not such attempts have been effective” (Mayer 92). One of the biggest threats is the Executive Branch and the Federal Reserve working together (Lockhart). A President with no checks or balances on the monetary policy, the American democracy that we now know and love would turn into a purely tyrannical dictatorship. As Plosser clearly...
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...development and economic growth, even a slight dip in the financial markets can radically effect how the economy, businesses, and individuals respond. (Ask Dr Econ, 2005) Financial markets “facilitate the raising of capital in the capital markets, the transfer of risk in the derivatives market, price discovery, global transactions with integration of financial markets, the transfer of liquidity in the money markets, and international trade in the current markets.” (Financial Markets, 2013) When the financial markets are doing well, “firm-level, industry-level, and cross-country studies all suggest that the level of financial development exerts a large, positive impact on economic growth.” (MIT, 2001) When financial markets are not doing well, interest rates on loans will increase and access to credit decreases. Interest rates are higher because of the risk that banks feel are involved. In times of high risk, interest rates go up. It is a way for banks to limit their losses and make as much money back – just in case a default occurs. So those businesses that are able to get credit are finding that it is more expensive than it used to be. Many companies need credit – loans – in order to sustain day to day operations. When the financial markets are in upheaval, and there is concern about lending, businesses have trouble getting the capital they need to keep running because banks are reluctant to lend to businesses, due to the fact that so many businesses, large and small, have...
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...a combination of both monetary and fiscal policy will be needed in order to bring the nation out of this severe recession. Prices are falling, with the inflationary rate at -2.4%, making it evident that both businesses and individuals are not spending and overall aggregate demand (AD) is falling. The Economic Consultant to the President, Mr. Raymond Burke, has recommended that the President lower interest rates to further help businesses and consumers “get back on their feet.” There are some inaccuracies in what Mr. Burke is recommending. The President has neither the ability nor the authority to make adjustments to interest rates. The Federal Reserve (the Fed) is responsible for the discount rate and for setting the reserve requirements. I do not agree with Ms. Patricia Lopez’s (Consultant to the Federal Reserve) recommendation to leave interest rates alone, sell bonds and raise the bank reserve. Raising the bank reserve will discourage banks from lending, which prevents businesses from expanding operations or from consumers from obtaining loans to purchase goods. I would recommend pursuing the implementation of expansionary policy to combat unemployment with the goal of expanding the money supply to encourage economic growth and/or plateau inflation. Lowering interest rates and possibly decreasing the reserve requirement will allow banks...
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...congress and the Federal Reserve do to stimulate and contract the economy. Next, this paper also will identify what motivates policymakers to stimulate or contract the economy. Then this paper will explain what the Federal Reserve says about policy goals and the strength of the economy. Lastly, the strength of other economies outside the United States as on Apple Inc. and what changes are recommend in Apple Inc.’s competitive strategies or supply chain will be discussed. Stimulating and Contracting the Economy When the economy is steady it helps businesses flourish and stay prosperous. When it is time to stimulate the economy it is ordered by the President and Congress. The President will propose a budget for the upcoming fiscal year; these proposals are presented to congress for approval. There are many ways a stimulus can occur; creating tax breaks and job creation are a few. The American Jobs Creation Act was created in 2004, within this act bipartisan support, infrastructure investments, tax breaks for small businesses and unemployment help were included (Boushey, 2011). Another option to stimulate the economy is to decrease interest rates. When you start talking interest rates, this is where the Federal Reserve steps in. The Federal Reserve has control over interest rates. When the interest rates are lowered, it affects the economy on a broader scale when it comes to consumption, business, investment, and the new home construction. When interest rates are lower...
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...Fiscal policy is the use of the government budget to affect an economy. When the government decides on the taxes that it collects, the transfer payments it gives out, or the goods and services that it purchases, it is engaging in fiscal policy. The primary economic impact of any change in the government budget is felt by particular groups make tax cut for families with children, for example, raises the disposable income of such families. Discussions of fiscal policy, however, usually focus on the effect of changes in the government budget on the overall economy on such macroeconomic variables as GNP and unemployment and inflation. Fiscal Policy also can be explained as the economic term which describes the behavior of governments in raising money to fund current spending and investment for collective social purposes and for transfer payments to citizens and residents of the territory for which the government is responsible. The money may be raised by taxation, by borrowing, by user charges on social assets or services, or by fiat. Fiscal policy can include deficit spending to stimulate demand for domestic goods and services to help unemployment or make efforts to cut deficits or raise the budget surplus to fight inflation. There are many different types of Fiscal Policy. It all depends on the given situations the government is in. A government may adopt certain policies that can either increase or decrease...
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...Federal Reserve Monetary Policy ECO/372 University of Phoenix The American economy has been through Hell and back in the new millennium, and for some time economist speculated of the dismal circumstances to affect the U.S financial structure as a whole. This paper is going to highlight a variety of current macroeconomic indicators by specifically defining the objectives of the Federal Open Markets Committee and stating the economic projections for 2015 in hopes of painting a clear picture of the current financial state of the U.S economy. With growth reported in GDP and incomes this past year, there is still concern surrounding overall consumer opinions on the state of our nation’s economy. The results of the Michigan surveys index of consumer sentiment as included as well within the Monetary Policy (2014). This demonstrates the country continues to feel the economy is strengthening as well, as their overall confidence of their own financial situations. However, we are still well below average on the index report which also is reported without much change in the last year. Although we have improved our outlook since the recession that occurred in 2008, we remain guarded and safe in our observations. With slowly increasing consumer sentiment, housing starts continue to increase slowly along with our post housing bubble recession recovery (Monetary Policy, 2014). Single family and multifamily starts show a very slow trending increase but at a .6 high index for 2014...
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...American society. It is still one of the greatest defining eras in US History. In general, we know what caused the Great Depression, but these causes are still debated even today. It happened after a period of great prosperity (The 1920s) when American commerce was growing. The issues that surround the causes of the depression are still issues today. Task: Using information from the documents and your knowledge of United States history and government, answer the questions that follow each document in Part A. Using your answers from Part A you will write an essay (Part B) in which you will be able to: • Discuss the following three causes of the Great Depression, o Use of Credit o Over speculation o The Federal Reserve’s Monetary (Money) policy Use the box below to organize your notes and ideas that can be used to convert into an essay. Part A: Short Answer Document #1 Ford Advertisement: 1920 [pic] Duke University Library 1. An average annual wage of all industries in the 1920s was about 1400.00 dollars a year. Many workers averaged (depending on the job) between .50 cents per hour up to 2.00 dollars per hour). How much does a worker make a month making 1.00 per hour (40 hour work weeks)? _____________________________________________________________ 2. How much would a 1920 Ford Touring cost per month if bought with an installment plan of 12 installments (one every month) in one year?_______ 3. What happened in...
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...The Federal Reserve Term Paper The Federal Reserve After several periods of economic and banking problems, the United States of America was searching for a fix. In December of 1913, the American Congress approved the Federal Reserve, which President Woodrow Wilson signed into law. By 16 November 1914, a working Federal Reserve was set up in 12 cities chosen as regional Reserve Bank sites. These reserve banks were privately owned banks. The Federal Reserve wielded unprecedented power, which was noticed during the beginning of World War I (WW-I) when the Federal Reserve set interest rates for American banks and helped finance Europe’s war efforts until 1917, when the U.S. declared war on Germany and financing America’s war efforts became paramount (Education, 2013). “I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small dominate men.” Woodrow Wilson (History of the Federal Reserve, 2013). As you can decipher from President Woodrow Wilson’s quote about the Federal Reserve...
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...Title: The Federal Reserve Name: Jane Doe Course: Eco 320/Understanding Prof. John Smith Date: 11/28/2012 It would not be an overstatement to say that the U.S Economy is very strong at least compare to other countries. One is sure that listening to the news and the politicians in Washington, DC they render a different opinion. But these tactics are just to scare people and make believe on ideals that have nothing to do with the actual state of the Economy. The fact is we now live in a global economy and what happen in Europe can have a major affect in the U.S economy. The European Union is not very stable at this moment and probably never will be stable, because the adaption of the Euro has failed on its main objective. The U.S Dollar is still the preferred and trusted paper for the world to conduct trade. The role of the Federal Reserve is to keep that trust and confidence in the U.S Dollar at home and abroad. To gain more prospective on the role of the Federal Reserve it is imperative to answer and explain the following questions: Evaluate the role and effectiveness of the Federal Reserve in stabilizing the current economy. The American economy is a complex balance of services, financial, manufacturing, agricultural, and banking industries. For this reason, the U.S. is a global economy, relying upon foreign investments and trade to create and retain wealth. Over the years, America has evolved from farming-based, to industrial, to a services-based economy...
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...The Federal Reserve Ryan Butler 23 August 2011 Evaluate the role and effectiveness of the Federal Reserve in stabilizing the current economy. The American economy is a complex balance of services, financial, manufacturing, agricultural, and banking industries. For this reason, the U.S. is a global economy, relying upon foreign investments and trade to create and retain wealth. Over the years, America has evolved from farming-based, to industrial, to a services-based economy. As a result, the banking system from its inception has weathered the many growing pains associated with a new government and currency, instituting regulations and a centralized bank to examine the economy, and implement policies intended to offset factors negatively affecting the general financial health of the country. Now, as the United States moves towards a globally interdependent marketplace, the stakes are much higher than they were when Congress established the Federal Reserve in the early 1900’s. A country’s debt can now become the world’s debt, and the role of the U.S. federal banking system is now considerably more under pressure and scrutiny than ever before. As we have been seeing with the current liquidity crisis in the U.S., and how it has affected U.K. and Asian markets, strong, comprehensive policy-making is now crucial to sustaining long-term economic viability. Even despite the growing need for quick, precise actions by the Federal Reserve System, the decision-making regarding the...
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...Monetary Policy and the Federal Reserve: Current Policy and Conditions Marc Labonte Specialist in Macroeconomic Policy February 9, 2015 Congressional Research Service 7-5700 www.crs.gov RL30354 Monetary Policy and the Federal Reserve: Current Policy and Conditions Summary The Federal Reserve (the Fed) defines monetary policy as its actions to influence the availability and cost of money and credit. Because the expectations of market participants play an important role in determining prices and economic growth, monetary policy can also be defined to include the directives, policies, statements, and actions of the Fed that influence future perceptions. Traditionally, the Fed has implemented monetary policy primarily through open market operations involving the purchase and sale of U.S. Treasury securities. The Fed traditionally conducts open market operations by setting a target for the federal funds rate, the rate at which banks borrow and lend reserves on an overnight basis. Beginning in September 2007, in a series of 10 moves, the federal funds target was reduced from 5.25% to a range of 0% to 0.25% on December 16, 2008, where it has remained since. With the federal funds target at this zero lower bound, the Fed attempted to provide additional stimulus through unconventional policies. It provided forward guidance on its expectations for future rates, announcing that it “anticipates that, even after employment and inflation are near mandate-consistent levels, economic...
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...Raymond Burke is an economic consultant who believes that the nation’s interest rate should be lowered in order to stimulate the economy. Unfortunately, I must disagree with Burke. With a presence of the overabundance of cheap houses and a lack of demand will not enable the nation to recover with better interest rates. The majority of people that are capable of working but are not working are at a serious incline. The average person does not attempt to borrow money that can’t be re-paid. With the unemployment rate projected to increase, I don’t see a line of people ready to borrow money when people are without income to pay it back. My recommendation is to leave the interest rate alone, don’t increase it or decrease it. Kathy Lee’s view on the budget deficit has an emphasis on the government implementing budget cuts instead of raising taxes. The budget deficit is a serious concern; this is why I must agree with Kathy’s view. My recommendation is to agree with Kathy’s view. The reason is that people have already cut back on their spending. The awful result of higher taxes makes an already slow economy turn into a halt. Patricia Lopez is a Federal Reserve consultant makes two excellent points: to leave interest rates alone and furthermore, increasing money supply through voluntary investments (by the sale of bonds), always goes over much better that feeling increased taxes. Banks that have higher reserve requirements would not need to bed the government for future bail outs. Allison...
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....ad-textlink FEATURED VIDEO Four mutual funds to consider if interest rates rise are the Fidelity Select Construction and Housing Portfolio, Fidelity Select Banking Portfolio, Rydex Retailing Fund and ProFunds Short Precious Metals Fund. Interest rates typically rise due to central bank hikes when it becomes concerned about inflationary pressures. However, recent global trends make inflation unlikely. Economies around the world – specifically in Europe and Japan – remain crippled by a lack of demand. Governments are unwilling to deploy fiscal policy to generate demand due to concern about debt and deficits. Most countries continue to struggle with deflation rather than inflation. In addition to weak demand, which leads to lower prices, there is a staggering excess of labor. When the supply of labor is plentiful, inflation is transitory, as there is no feedback loop between wages and prices. Due to the global nature of the economy, this deflation has been exported. Since the Great Recession, any uptick in inflation in the United States has been temporary despite years of growth. Any interest rate rises are due to central banks seeking to normalize monetary policy to have tools for the next downturn. Of course, this action communicates that the economy is strong enough to stand on its own without monetary support. It is also evidence that certain sectors of the economy are doing well, such as housing, labor, banking, insurance and consumer spending, which are integral to the...
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...chapters describing the structure of the Federal Reserve System and the money supply process, we mentioned three policy tools that the Fed can use to manipulate the money supply and interest rates: open market operations, which affect the quantity of reserves and the monetary base; changes in discount lending, which affect the monetary base; and changes in reserve requirements, which affect the money multiplier. Because the Fed’s use of these policy tools has such an important impact on interest rates and economic activity, it is important to understand how the Fed wields them in practice and how relatively useful each tool is. In recent years, the Federal Reserve has increased its focus on the federal funds rate (the interest rate on overnight loans of reserves from one bank to another) as the primary indicator of the stance of monetary policy. Since February 1994, the Fed announces a federal funds rate target at each FOMC meeting, an announcement that is watched closely by market participants because it affects interest rates throughout the economy. Thus, to fully understand how the Fed’s tools are used in the conduct of monetary policy, we must understand not only their effect on the money supply, but their direct effects on the federal funds rate as well. The chapter thus begins with a supply-and-demand analysis of the market for reserves to explain how the Fed’s settings for the three tools of monetary policy determine the federal funds rate. We then go on to look in more detail...
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