Federal Reserve Actions on the Discount Rate

Federal Reserve Actions on the Discount Rate

Introduction

When Federal Reserve talks about controlling the growth and inflation in the economy, interest rates are one of the key methods to do that. The movement and trend in the interest rate pretty much define the growth prospect of the economy as both these things are interrelated to each other (Cecchetti et al, 2006). While increase in interest rate can lead, it lead to lower investment as people will be more content to place their money in financial institutions rather than spending it. While on the other hand, decrease in interest rates might lead to increase spending and consumption that will lead to higher growth. Thus it can be seen that interest rate can be one of the driving factors of the economy (Mallick & Mohsin, 2010).

Research Question

Federal Reserve is entrusted with the responsibility of having a check on prevailing interest rate. And some of the tools that are being employed by Federal Reserves as far as controlling the interest rate is concerned is discount rate. It is an interest rate that is charged when banks are borrowing funds from FED at short term basis; mostly these are overnight repurchase agreements (Mallick & Mohsin, 2010). There are other tools as well that FED brings into use when it wants to control the interest rate but discount rate is one of the more extensive and important tools. So it became very important for FED to keep a balance and provide higher employment opportunity as well as maintain constant level of inflation. In this paper, it will be seen how FED has been able to achieve these objectives for last three years. There will also be a thorough analysis of what are the trends as far as discount rate is concerned, it will also be seen what sort of effect FED action has had on the overall level of employment and inflation and how successful the policies were (Mallick & Mohsin, 2010).

Research Concepts

When one looks at the responsibility of FED, they are assigned with keeping inflation at a certain level as well as providing constant growth and employment in the economy. When one looks at both these macroeconomic objectives, they are completely opposite in their nature. It is because when FED opts for expansionary monetary policy, they will go for an overall decrease in discount rate (Cecchetti et al, 2006). This will even though increase the growth prospects, but on the other hand, will lead to higher inflation. On the other hand, when FED contracts the money supply and eventually lower the discount rate, it will lower the inflation rate but also escalate the level of unemployment due to the lack of economic activity that precedes it(Burda & Hamermesh, 2010).

Topic Research

After the events of 2008, the USA economy has been more on the conservative side as its tries to recover from the recession. FED has an important role to play as far as controlling the aftermaths of inflation, ...