Question

Does a change in the fed funds rate really have an actual direct monetary influence on the markets or is it nothing more than a perception? Explain please

Answer 1

According to the text, the federal funds rate is “the interest rate that commercial banks charge each other for loans of reserves to meet their minimum reserve requirements” (Farnham, 2018). I think that this tool does really have an actual direct monetary influence on the market. Considering that the federal funds rate is one of three tools that the government has when it comes to any monetary policy changes; the others being open market operations and reserve requirements. Another important takeaway from the text was that “fed policy focuses either on changing interest rates directly or on changing bank reserves” (Farnham, 2018). Seeing as both of those concepts are affected by the federal funds rate I would go even further to say that the federal funds rate has an actual direct monetary influence and is not just a perception. According to an article on The Balance called Fed Funds Rate, Its Impact, and How It Works, the author Kimberly Amadeo considers the fed funds rate to be “a tool to control U.S. economic growth” and that it is “the most important interest rate in the world” (Amadeo, 2019). That particular part of the article stuck out to me, because it relates to inflation. Inflation has negatively impacted economies all over the world. Seeing that the fed funds rate helps in controlling inflation makes it an even more important tool.