Question

Go to www.federalreserve.gov/FOMC/default.htm, the official Wed site of the Federal Open Market Committee (FOMC) of the Federal Reserve Board. Scroll down the page and choose the link to one of the most recent statements from FOMC meetings. In your initial response to the topic you have to answer all questions: Define the Federal Funds Rate. What is the current Federal Funds Rate? Define the Federal Reserve Discount Rate. What is the current Federal Reserve Discount Rate? What are the factors cited in this statement that determined the FOMC’s decision of changing (or keeping constant) its target for the federal funds rate? Does the Fed have control over the federal funds rate and over bank reserves? If so, can the Fed control both simultaneously?

Answer 1

Ans 1= FFR- is the ROI at which banks loan reserve balances to other depository establishments for overnight use. This is an uncollateralized loan.

ans 2= The prevailing FFR = 1.5 %

ans 3=Federal discount rate- is the ROI fixed by the Fed on advances provided to entitled commercial banks as a way to resolve liquidity issues & the burdens of reserve stipulations.

Ans 4= The prevailing discount rate = 2.0 %

Ans 5= Interest rates can increase only if inflation rate increases from prevailing levels of approximately 0 % to the Federal bank’s target rate of 2 per cent & if the rates of unemployment decline.

Ans 6= The central bank has indirect control over the FFR, as it controls the supply of overall bank reserves via open market operations. But , it can’t regulate the demand for bank reserves. Suppose the demand for bank reserves rises, the FFR will increase. If the central bank wishes to freeze the FFR, it must create more bank reserves through open market procurements . On the other hand, suppose the central bank wishes to regulate the amount of bank reserves, it has to allow the FFR fluctuate. Thus, it can’t regulate FFR & the level of bank reserves at the same time.