Question

Why has the Federal Reserve chosen to focus on the federal funds rate rather than some other interest rate as a tool of monetary policy?

Answer 1

Solution:

Below are some of the reasons why the Federal funds rate is preferred over other interest rates:

1. The federal funds rate is helpful in controlling inflation and assist in the positive growth of the economy.

2. It monitors interest rates for short and long periods as well as foreign interest rates.

3. It is one of the most important interest rates in the world.

4. It can impact the monetary and financial conditions of the country.

5. The dollar amount placed in the federal reserve changes with the federal fund rates.

6. It is the interest rate at which the banks and other institutions lend their deposits to other financial institutions.

7. Every day, the bank often borrows money from other banks to meet the customer's needs and the bank that loans charge a federal interest rate sum.

8. The rate needs to change every now and then, which is why the Federal Open Market Committee ( FOMC) holds a meeting every 8 years, by reviewing the country's economic situation and giving priority to the economic goals and the global financial situation. The FOMC, therefore, agrees to boost the economy and development of the country at the Federal Funds pace.