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

1. Federal fund rate refers to the rate at which interest is being charged by the bank from each other in order to provide funds overnight. These Federal Reserve fund help maintain the reserve requirement as prescribed by the central bank. The current rate associated with federal fund accounts for 1.5 percent.

2. The discount rate associated with federal reserve reflect the amount being charged by the central bank in U.S. from its member banks in lieu of the funds borrowed from the discount window so as to maintain the required reserve by member banks. The current discount rate that has been raised by board of governors of Federal Reserve accounts for 2 percent as on December 14, 2017.

3. Changes underlying the rate of federal fund will result in interrelated events that are going to impact the prices of goods and services, output, employment, range of economic variables, amount of money and credit, long term interest rates, foreign exchange rates, short term interest rates.

4. There exists indirect control by Fed over the federal rate for funds because it possesses control towards the net bank reserves supply underlying the system of banking through market operations that are open in nature. However the demand cannot be controlled by Fed for the bank reserves. The federal fund rate tends to rise with an increase underlying demand for the federal fund. There is a need to create additional bank reserve if Fed opts to peg rate for federal fund. However if fed on the other hand opt to control the level associated with bank reserves, they need to allow the rate of federal funds to fluctuate. Hence, it can be concluded that the level of bank reserves and the federal fund rate cannot be controlled by Fed.