The Procedure of Affecting Bank Rates by the Federal Reserve
When the Federal Reserve Bank was formed by the Congress in 1913 to be the central bank of the US it was given an essential task. This central bank had to come up with a monetary policy for America. It also had to control how a number of banks functioned. Falling within the Fed are twelve participants that make up the Federal Open market Committee. There are also a further seven on the Board of Governors of the Federal Reserve System. An additional participant is the president of the Federal Reserve Bank of New York. It is the responsibility of the Federal Open Market Committee to meet a minimum of eight times a year. During periods of requirement the members have to be in contact via the telephone. This is also expected if there are circumstances that are deemed special.
At the present time the federal funds rate target is 5.25 percent. This is part of the aim of the Federal Open Market Committee. The 5.25 percent rate is only applicable to loans that last one night and it must be a bank to bank loan. Banks borrow to banks to help them out but also to keep within the regulations that have been set up by Fed in order to manage their reserves. The Federal Fund rate has moved up to 8 percent. This took place in 1990 and it was the most it has ever been in sixteen years. But it has also been as little as 1 percent. This was a very recent development. For the citizens of the US there is a special handbook that has been published for their use. It is known as the Beige Book and is a report by the Fed. This particular handbook is released as eight copies in a single year. It also contains a great deal of interesting and pertinent information. It is extremely worthwhile for citizens to make use of the opportunity to follow what is happening in the management of the economy. A body that is as powerful as the Federal Reserve Bank should be completely transparent in their decisions and dealings.
In order for the Fed to regulate the rates of interest it must increase or lower the Federal Funds rate. In the short term the influence of this decision can be clearly seen on the rates of interest. This is obvious regarding T-bill rates of interest not in excessive of five years. Usually all banks will be influenced by the rates of interest caused by the Fed. It is well known that when the Federal Rates are made higher then it can be expected that the commercial banks will make their prime rates higher as well. Right now the rate of interest is three percent and this is considered as high because it is higher than the Federal Fund Rate. Should the Federal Fund Rate of 5.25 percent be hiked up to 6 percent the influence of this act will make the banks’ prime rate from the present 8.25 percent to 9 percent. This will make the price of credit that is made available to home owners increase. It does not bode well for any person who has a second mortgage that is influenced by prime rates. Another negative aspect of the Federal Fund Rate going up is that credit cards are also influenced.