Federal Reserve Rate Changes
The reason for the Federal Reserve Bank’s formation is to regulate fiscal policy. This bank has been doing this since 1913. It is expected that the Federal Reserve Bank is to maintain an economy that is steady. There is no dispute that this bank has enormous influence. The Federal Reserve Bank takes care of the banking needs of the federal government. It is also the central bank of the United States. If you think that this is the body that has the authority to regulate the money flow in the entire US then you can begin to understand just how powerful it is.
It is a requirement that all the banks in the US have accounts kept for savings. All the money that is placed in this account may not be given to customers. This money is only for loans to other banks i.e. bank to bank loans. Borrowing banks have to pay interest on the loan. This interest is called the Federal Reserve rate. As the name implies it is the Federal Reserve Bank that decides on this rate. It is the amount that the Federal Reserve Bank demands from banks that borrow money.
Federal Reserve Rate Changes
It is not only borrowing banks that are influenced by the Federal Reserve rate but also credit cards, mortgage and car loans. Interest rates are demanded by the Fed in order to make borrowing pay and these rates are federal discount rates. The Federal Discount rate is higher than the Federal Reserve rate. The money that is borrowed from the Federal Reserve Bank by commercial banks is what is loaned to clients.
The regulation of the flow as well as the amount of money within the economic system of the country is the objective of the Federal Reserve Bank. It would be fair to say that commercial banks are in business to make as much money as possible. The banks do lose out when the rates of interest are hiked up by the Fed. This is because the commercial banks are prevented from making as much earnings as they could from loans to their clients. But they smile again when the Fed decides to lower the rate. This once again enables the commercial banks to make a hefty profit out of their clients’ loans.
The pace of money that is in the economy is affected by changes in the rate of interest. A rate of interest that is less will enable banks to make loans easily. This encourages people to take out loans and it results in money flowing into the system. This means that there is more money available in the economy. When the rate of interest is increased it discourages borrowing by the citizens. This slows down the entrance of money into the economy. It can be seen that interest rates do indeed determine the pace of money in the economic system of the country.
It must be understood that consumer interest rates and Federal Interest rates do not have an obvious link. This means that Federal Interest rates do not affect consumer interest rates.