Question

Appraise how the current Federal Reserve's monetary policy has been affecting the financial markets and institutions.

Answer 1

The Fed influences interest rates to affect interest-sensitive spending such as plant and equipment spending on business capital, consumer durables spending on households, and investment in residential properties. Moreover, as interest rates diverge between countries, it creates movements of capital that influence the exchange rate between foreign currencies and the dollar, which in effect affects export and import spending. In short, monetary policy can be used across these channels to boost or delay aggregate spending. Monetary policy impacts primarily on inflation in the long run. A low and steady inflation rate fosters market stability and, ultimately, sounder economic decisions.

Changes in real interest rates primarily affect the public's demand for goods and services by altering borrowing costs, bank loan availability, household income, and foreign exchange rates. A decline in real interest rates, for example, lowers borrowing costs; that leads companies to increase investment spending, and leads households to buy durable goods, such as cars and new homes.

Furthermore, lower real rates and a stable economy can increase the willingness of the banks to lend to companies and households. This can increase spending, especially by smaller borrowers who have few other sources of credit than banks.

In the short term, lower real interest rates in the U.S. often appear to decrease the dollar's foreign exchange value, which decreases the prices of the products manufactured in the U.S. that we export internationally and increases the prices we pay for foreign-made goods. This leads to higher aggregate spending on products and services manufactured in the U.S. The rise in overall demand for the output of the economy across these different channels allows businesses to increase production and employment, which in effect further raises business spending on capital goods by putting greater demands on established manufacturing capacity. It also boosts demand further due to the revenue increases arising from the higher economic level