Question

(2) The Federal Reserve Bank of New York plays a unique role compared to other Reserve banks. What are its unique functions that set it apart from the other Reserve banks?

(3) On March 15, 2020, the Federal Reserve lowered its target for the federal funds rate to a range of 0% to 0.25%. Please answer the following questions:

(a) What is the difference between the federal funds rate and the discount rate? Which does the Federal Reserve actually control?

(b) Why does a lower federal funds rate incentivize lending and why might that be a goal that the Federal Reserve currently has?

Answer 1

Federal Reserve Bank of new York plays a unique role in coparison to other Banks because international trade is dominated by Dollars. This dominace gives prominent role to federal reserve and slight changes in it's policies effects various woeld economies and have to bring changes in their on own monetary policies to mild down the effects bought by federal reserve bank ba New York.

The unique fuction which sets it apart from other reserve banks is that changes in interest rate by federal reserve bank will bring changes in both stock market and bond market. If interest rate is increased this will make U.S government bonds more lucrative than other countries bonds and will take away foreign portfolio investment from other countries.

Federal funds rate is the rate at which commercial banks can borrow from each other if they face any surplus or shortfall in their reserves.

On the hand federal discount rate is the rate at which commercial banks borrow from federal reserve bank if they face any shortfall in their reservation.

Reserves are certain amount of money that commercial banks are supposed to keep out of their total deposits with federal reserve bank. Any access can be given to another bank facing shortfall on the basis of interest out of funds rate to keep their reserves.

Federal Funds rate is decided by Federal open market committee which consists of members fron federal reserve banks as well as governor's.

Federal discount rate on the other hand is drcided by federal reserve'soard of governors. Thus federal reserve has more control over determining discount rate.

Lower federal finds rate incentivise lending because it helps in bringing down interest rates of commercial banks.With Lower interest rates investment becomes lucrative due to lower loan cost . Higher investment will help in reducing uneployement level as well as increasing income level . Thus , it will help in controlling economic slowdown.