The Federal Reserve’s Tactics

By | February 26, 2014

Federal Reserve

In the economic climate, do you understand the importance and the power that the Federal Reserve has over the economic growth and development? It is interesting to see how it is trying to work for the growth and the well-being of the population, but is the objective working?

The flow of money

When the money is flowing in the right direction and all around looks rosy, no one seems to notice or care at the importance of the Federal Reserve has in this process; that is, until things start to look bleak.

The Federal Reserve was created to help protect the financial markets in America. It was supposed to boost the economic growth and to reduce the potential problems that can arise with inflation. It was given the power with which to control these situations, but what wasn’t expected was the need to help ‘stabilize the economy’ according to Investopedia.

The concept behind the creating of the Federal Reserve was to help the banks lend more money, to stop the problems that were often associated with the economic slump that happened, when credit and money become unavailable. They were there to give the banks the option of having more money with which to lend out to others.

The tools the Federal Reserve uses

There are a number of tools that the Federal Reserve uses to help stabilize the economy. They each play an important role in helping to encourage the growth of the country or to slow down the rate of inflation.

The banking industry has a restriction on the amount of money that is deposited into accounts and on how much they are then allowed to lend out. This is set in a ratio of the money that is deposited. If this ratio is set at 10% for example, then for every $100 paid in to the bank, the bank could only lend out 90% of this money. But, if the Federal Reserve is looking to boost the amount of money in circulation, then they would decrease the ratio, say, to 5%, which would allow more money to be lent out by the banks. This would increase the amount of money that was available and help to booster the economy. But if inflation was rising too quickly then increasing the ratio would have the effect of slowing down the economy.

The rate that the Federal Reserve lends out money to the banking institutions is called the Discount Rate. It is this rate which is another tool that the Federal Reserve uses to increase and slow the rate that the money is able to circulate. If this rate is high it reduces the amount of money that is available and this reduces the spending of businesses and people across America.

The resulting power

This power that the Federal Reserve has over the money that is circulating in America is supposed to help grow the economy and help to regulate inflation. Is the system working or is it causing even more problems in the long term?




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