The purpose of this exercise is to encourage students to find up-to-date informa

Question

The purpose of this exercise is to encourage students to find up-to-date information about the money management tools used by the Federal Reserve System. The information can be obtained by visit- ing the Federal Reserve Board website at www.federalreserve.gov." (Sometimes the Web address for a location changes. You might need to search to find the exact location mentioned.) 1. What is the current federal funds percentage rate? How has this rate changed in the past year? 2. W s the current reserve requirement for banks? Is the reserve requirement the same for all banks ("depository institutions")? 3. What is the primary concern of the Fed Open Market Committee now inflation or recession? 4. Look back at the Open Market Committee actions for previous years. Compare the actions of the cra

Explanation / Answer

Ans 1) Federal funds percentage rate (Fed rate, in short) is the interest rate at which financial institutions (mostly banks) lend reserve balances (i.e excess funds) to other financial institutions on an overnight basis. It is one of the most important interest rates for the federal economy.  The fed funds rate is important because it controls short-term interest rates. These include banks' prime rate, the LIBOR (lending rates of international banks), most adjustable-rate and interest-only loans and credit card rates.

At present Fed funds rate is 1.25%. The changes undergone by this rate in the recent past are as follows:

This data shows that in the past year, Fed rate was increased by (1.25 - 0.5)% = 0.75%.

Ans 2) Currency reserve requirement is the minimum amount of cash any bank must hold in reserve against deposits made by all its customers. This may be in the form of vault cash or s reserves in the nearest federal bank.

No, reserve requirements are not the same for all banks.As per 2016 directives, reserve requirements for banks are specified in 3 slabs:

Ans3) Some members of the FOMC are predicting recession while others anticipate infaltion. However, the preliminary focus at present is preventing recession to avoid a crisis like 2008.

Ans 4) As discussed in ans part 1, due to a change in fed rates, interest rates across the board have increased in the US twice between 2015 and 2017. Emphasis has changed largely from controlling inflation to preventing another recession.

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