4.2 Discussion: Federal Reserve Tools 

Conduct a critical analysis of a posting by two of your classmates by the end of the workshop.

1. The topic of your discussion response should be your classmates posting and should be written as if you were reviewing his/her posting in an academic journal. Your discussion response should, therefore, answer the following questions as applicable:
   1. Were your classmates arguments articulate and logical? Were the facts correct?
   2. Was the interpretation your classmate provided reasonable and consistent with experts in the field? Was your classmate consistent with both the substance and intent of his/her references?
2. The focus for your critical analysis is not whether or not you agree with your classmate, but how well his/her position was presented. Each response should be at least 200 words in length and cite two academic sources.  Please strive to make your discussion responses ones that cause iron to sharpen iron.

PEER REVIEW 1: 

These three tools can be used by the Federal Reserve to change the money supply and interest rate in the economy (Binder, 2017).

Discount Rate: The discount rate is the rate that Reserve Banks charge on simple lending to financial institutions. Discount rate borrowing by the Federal Reserve complements monetary policy in reaching the goal fed funds rate and acts as a funding backup for financial institutions. Decreasing the interest rate is contractionary and other borrowing costs are influenced by the rate of return. Lower rates facilitate enhanced customer credit and investment. Similarly, rising the interest rate is expansionary and other borrowing costs are affected by the rate of return. Higher rates deter customer and business credit and investment. The Reserve Banks and the Governing board are making adjustments to the rate of return.

Reserve requirements: It is the portions of deposits that banks must hold in cash, either in their vaults or on deposit at a Reserve Bank. A decrease in reserve requirements is expansionary because it increases the funds available in the banking system to lend to consumers and businesses. An increase in reserve requirements is contractionary because it reduces the funds available in the banking system to lend to consumers and businesses. The Board of Governors has sole authority over changes to reserve requirements. The fed rarely changes reserve requirement.

Open market operations: The buying and selling of U.S. government securities, has been a reliable tool. As we learned earlier, this tool is directed by the FOMC and carried out by the federal reserve bank. The Federal Reserve will generate the goal fed funds rate these have established by supplying or otherwise taking funding from financial institutions by reselling treasury securities from them using this method of international market purchases. The purpose of OMOs is to exploit a country’s economic brief rate of interest as well as the availability of monetary base. Its open market practices are the instruments it utilizes to acquire and sell shares in the stock market to reach the inflation target. Through buying securities with newly generated funds, the federal reserve is able to raise the supply of money and reduce the real interest rate. Likewise, the central bank will sell its income statement assets and remove cash from trade, placing a favorable impact on the exchange rate (Straw, 2000).

Interest on Reserves: It is the latest and perhaps most commonly used instrument provided by Congress to a Fed since the 2007-2009 Financial Crisis. Exchange interest is paid on surplus assets held by Reserve Banks. Note that banks are mandated by the Fed to keep a proportion of the reserves. In contrast to such deposits, banks also keep additional surplus assets. The new strategy of charging interest on reserves encourages the Fed to be using inflation to manipulate credit creation as a monetary policy tool. For starters, if the FOMC were to provide a broader opportunity for banks to lend the financial assets, the rate of interest it spends on bank deposits might be lowered. Instead of keeping it in inventory (so they can make more profits), lenders are much more willing to borrow money to establish a contractionary agenda. In the other hand, if the FOMC were to establish an opportunity for banks to maintain more surplus capital and lower loans, the FOMC would be able to raise the interest rate charged on capital, which is an expansionary strategy.

The most important tool that is used by the federal reserve to change the money supply and interest rate in the economy is the discount rate that is mostly used by federal reserve to change the money supply and interest rate.

References

Binder, C. (2017). Federal Reserve Communication and the Media. Journal of Media Economics, 30(4), 191214.

Straw, J. (2000). Federal Reserve Board. Journal of Business & Finance Librarianship, 5(3), 57.

PEER REVIEW 2:

Three tools used by Feds to change money supply and interest rates.

Three tools used to change the money supply and interest rates in the economy are: The three tools that the Federal Reserve uses to influence the interest rate are the open market operations, Federal funds rate and the federal funds market.

The expansionary monetary policy that the Federal Reserve develops just to increase the rate of growth of real GDP by associated get with the increasing the amount of bank reserves in the system as well as lowering the federal funds and other interest rates. These three tools of a policy change in money supply and interest rates can be discussed as follows

Open market operations: This is one of the first tools and the most important tool used by the Federal Reserve in developing the monetary policy. It involves the Purchase and sale of government securities in the open market in order to change the money supplied as well as influence interest rates.

Second is Federal funds rate: The interest rates by which the federal funds will operate and commercial banks will charge in terms of the loans or reserves and to bring about minimum reserve requirements is the stage.

Federal funds market: The consideration that private financial markets in which the banks for borrow and loan reserves to meet the minimum reserve requirements are developed our biggest challenges for an organisation such as the Federal Reserve will stop these three tools are of critical importance since they will fix the determination of the interest rate in the country. When the technical factors that are used in developing these policy is that apart from the commercial banking system reserved will not be influenced by a federal monetary policy.

4b) which of these tools is very important?

The most important of the tools used by the Federal Reserve is the open market operations. In this policy, it is found that the Federal Reserve detects the process of buying and selling of government securities in the open market and not in the organised stock exchanges by the Federal Reserve Bank Of New York and the section of financial open market operations is defined as open market operations. The Federal Reserve engages in operations that are liberal and transparent or in the open market so as to influence the amount of reserves that are in position by the commercial brands which in turn influence the federal funds rate (Herrmann, 2020).

The rate is actually charged by the banks for loans of observations and meet the minimum market requirement for stop banks are also seem to retain about 3 to 10% the demand deposits as a service. The cash component is invoice and nearly non-interest bearing deposits weather featuring concern. They have also fell onto additional exercises for clearing overnight checks as well as conduct or other purposes. The bank with reserves will be able to borrow them at the federal unit such that the federal funds market was monitored (Farnham, 2014).   

References

Farnham, P. G. (2014). Economics for managers. Pearson Education.

Herrmann, J. (2020). Managing For Results: How Higher Municipal Credit Ratings Increase Data Driven Management in Cities.

 

4.3 Discussion: Saying vs. Doing

Conduct a critical analysis of a posting by two of your classmates by the end of the workshop. The topic of your discussion response should be your classmates posting and should be written as if you were reviewing his/her posting in an academic journal. Your discussion response should, therefore, answer the following questions as applicable:

1. Were your classmates arguments articulate and logical? Were the facts correct?
2. Was the interpretation your classmate provided reasonable and consistent with experts in the field?  Was your classmate consistent with both the substance and intent of his/her references?

The focus for your critical analysis is not whether or not you agree with your classmate, but how well his/her position was presented. Each response should be at least 200 words in length and cite two academic sources. Please strive to make your discussion responses ones that cause iron to sharpen iron. 

PEER REVIEW 1:

 Across the Union States and around the globe, the COVID-19 eruption is starting to cause immense health and financial anguish. A dramatic drop in economic response to increases in lost jobs have been caused by the virus and indicators needed to prevent human safety, with both the rate of unemployment, that also it was at a 50-year low, rocketing to a historical level after the war. Consumer rising prices is held down by slower growth and considerably falling oil prices.

Economic activity: Many security precautions have been taken to limit this same transmission of infection in response to public medical crisis caused by the expansion of COVID-19. Such social distancing initiatives essentially shut down aspects of the business, leading to a rapid and unexpected decline in economic activity and an ancient rise in unemployment. Although efforts to mitigate viruses in many places did not start until the finished 2 months of February, particular emotional consumption spending (PCE) soared in March by 6.7 percent and in April by an unparalleled 13.2 percent.

Labor market: In the labor market, the severe economic consequences of the disease outbreak have been particularly visible. Workers have shed almost 20 additional workers from salaries since April, reversing approximately 10 months of job gains. The rate of unemployment jumped to a comment War II elevated of 8.5 percent in The first quarter from a 50-year close to zero of 3.5 percent in January and then moved to the still quite high 2.3 per cent in August Those of us with reduced income and cultural groups which are heavily targeted in low-wage employment have maintained a most serious lost jobs (Sergey, 2020).

Inflation: Economic growth in price inflation has suddenly stalled. In April, the 12-month effect on the price indicator besides PCE was really only 1.5 times. The 3-year PCE inflation measure excluding energy and food items (called core quantitative easing), which has traditionally been a good predictor as to where inflation rate will be in the long term than that of the average number, dropped from 1.8percent in April to 1.0% in April. This slow down reflected quarterly measurements for February – April which were particularly low in some classifications most immediately affected by the social trying to distance due to large price drops.

Financial conditions: As COVID-19 distributed in early February or over much of March, price levels plunged and marginal Bond rates dropped significantly, with lengthier equities yields trying to reach only those historic lows. Spreads on company bond rates over those on equivalent Treasury bonds increased dramatically as the company’s credit rating decreased and the functionality of the economy deteriorated; however, loans weren’t really available with most businesses, particularly companies below the corporate bonds (Yu, 2020).

Financial Stability: The COVID-19 epidemic has unexpectedly halted large swaths of industrial prosperity and has resulted in rapid financial ramifications. Banking sector weaknesses, especially those associated with volatility and maturity transition in the non-bank finance market, despite improved resilience to economic and legal legislation enacted since 2008.

International developments. The worldwide dissemination of COVID-19 and the steps taken to control it have had adverse effects on the economic economies. Recent evidence shows that global economy encountered the rapid and coordinated recession larger than in the Global Financial Crisis during the first half of each year, despite extensive and extreme blackouts.

Monetary Policy

Easing monetary policy: Taking into account the impact of COVID-19 on business growth and the threats to the future, the FOMC quickly reduced the federal fund rate goal level. Explicitly, the FOMC narrowed the benchmark interest rate cash rate by a total of 1-1/2 percent at second meeting in April, taking it to the new range of approximately to 1/4 level.

Safeguarding market functioning: In early February and most of March, the operation of the economy weakened in many countries, particularly the vital Treasury and agency MBS markets. To counter these changes, the Reserve Bank quickly took a number of regulatory measures. The FOMC has stated that it would buy Govt bonds and the MBS company in the sums required to ensure smooth running of the economy and the efficient transition of monetary policy to wider economic circumstances.

References

Yu. K. Zaytsev. (2020). Monetary and Fiscal Policy Measures during the COVID-19 Economic Crisis in Russia. : , 24(6), 618. https://doi.org/10.26794/2587-5671-2020-24-6-6-18

Sergey A. Andryushin. (2020). Monetary-crediting policy of central banks before and after COVID-19. Aktualnye Problemy konomiki i Prava, 14(2), 223234. https://doi.org/10.21202/1993-047X.14.2020.2.223-234

PEER REVIEW 2:

The Federal Reserve is utilized its full range of tools to assist the U.S. economy in this challenging time, thereby promoting its price stability goals and maximum employment.

The COVID-19 pandemic is causing immense human and economic hardship across the United States and around the world. The recovery pace in employment and economic activity has moderated in recent months, with weakness concentrated in the sectors most terribly affected by the pandemic. Consumer price inflation has been holding down by earlier declines and weaker demand in oil prices. Overall financial conditions persist accommodative, in part reflecting policy measures to businesses and the flow of credit to U.S. households and support the economy and businesses.

The pathway of the economy will depend remarkably on the virus’s course, including progress on vaccinations. The ongoing public health crisis weighs employment, economic activity and poses a considerable inflation threat to the economic outlook.

The Committee seeks to achieve maximum inflation and employment at 2 percent over the longer run. With inflation continually running below this longer-run goal, the Committee will direct to achieve inflation moderately above 2% for some time. So, inflation averages 2% over time, and longerterm inflation expectations remain well-anchored at 2 percent. Until these outcomes are achieved, the Committee expects to maintain an accommodative stance of monetary policy. The Committee decided to support the target range for the federal funds rate at 0 to 1/4 percent. It will be relevant to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of inflation and maximum employment has risen to 2% and is on track to moderately exceed 2% for some time. The Federal Reserve will also continue to increase its holdings of agency mortgagebacked securities by at least $40 billion per month and Treasury securities by at least $80 billion per month. Moreover, considerable further progress has been made toward the Committee’s price stability goals and maximum employment. These asset purchases help accommodate financial conditions and foster smooth market functioning, thereby supporting the flow of credit to households and businesses.

In evaluating the appropriate monetary policy stance, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee will produce to adjust the monetary policy stance as relevant if risks emerge that could impede the Committee’s goals. The Committee’s assessments will consider a wide range of information, including readings on labor market conditions, public health, inflation pressures and inflation expectations, and financial and international developments.

The Federal Reserve made the following decisions to execute the monetary policy stance notified on January 27, 2021, by the Federal Open Market Committee in its statement :

• To maintain the prime interest rate paid on excess and required reserve balances at 0.10 percent, effective January 28, 2021, the Board of Governors of the Federal Reserve System voted unanimously.
• The Federal Open Market Committee voted to direct and authorize the Open Market Desk at the Federal Reserve Bank of New York. Until ordered otherwise, to execute transactions in the System Open Market Account by the domestic policy directive is part of its policy decision.
• In a correlated action, the Board of Governors of the Federal Reserve System voted unanimously to approve the initiation of the primary credit rate at the current level of 0.25 percent.

The information will be updated as appropriate to reflect the Board of Governors’ decisions or the Federal Open Market Committee regarding details of the Federal Reserve’s operational tools and approach to implement monetary policy.

References:

1. Federal Reserve Board – Federal Reserve issues FOMC statement.
2. Federal Reserve Board – Implementation Note issued January ….
3. Read Feds December FOMC statement – MarketWatch.