Posts Tagged ‘the fed’

Americans are Spending More (yay!)… But Not Necessarily Getting More (boo)

Saturday, April 2nd, 2011

tiny-egg.jpg
(photo credit:  Eggybird)

Every month for the past eight months, dutiful Americans have been pulling out their wallets and handing their money to other Americans in exchange for goods and services. In other words, they’ve been lubricating the wheels of our creaky economic machine.

Why? Well, part of it is that they’re more confident now that the recession is over and there are real signs of a recovery. But the other, more significant part is that the cost of living increased. That’s right: inflation.

Food and gas prices went up, which means that more of Joe American’s dollars went to feeding his family and driving to work than to buying a new television or a trampoline for the kids.

Ben Bernanke from the Fed says that nobody should be worrying about out-of-control inflation – food and gas prices will come down again. But if he’s wrong, it’s the Fed’s job to take action to make sure Joe still has a few dollars left to pay for his morning coffee after feeding the kids and driving to work.

And by the way… while inflation sounds like a bad thing, it’s really not as bad as its evil twin, deflation.

Have you been spending more money since last summer? Why?

Monetary Policy is…

Wednesday, October 6th, 2010

Monetary policy is a plan of action that a Central Bank (like the Federal Reserve) sets in order to keep an economy stable. It’s really important to the overall health of a nation’s finances. The goal is to manage demand by manipulating a company’s money supply and tweaking interest rates.

Central Banks implement monetary policy using a few different methods:

  • Open-Market Operations – Directly buying and selling securities in the open market
  • Reserve Requirements – Setting regulations that dictate the minimum amount of money a bank must hold in reserve to back up its deposits
  • Discount Rate – Changing the rate of interest banks charge other banks to borrow money

Who is “the Fed?”

Monday, November 2nd, 2009

The “Fed” is the Federal Reserve, otherwise known as our national banking system. There are 12 Federal Reserve banks scattered across the country; their job is to loan money to local banks, who then loan it to the people. The Fed is controlled by the Federal Reserve Board, which consists of seven governors chosen by the President and approved by the Senate. The Board’s responsibilities include determining monetary policy, making reports to Congress, overseeing national banks, consumer protection, and discount rates, and setting standard requirements for other banks or institutions that store money.

The most important thing the Board does is head up the Federal Open Market Committee (FOMC), which meets eight times a year to discuss monetary policy. The FOMC consists of the seven members of the Federal Reserve Board, the President of the Federal Reserve Bank of New York, and four of the other eleven Federal Reserve Bank Presidents, who take turns serving on the Committee. The FOMC votes to determine the discount rate (the interest rate at which the Federal Reserve lends to other banks), how much capital banks will be required to have on hand for financial security, and open market securities (how and with which companies the Federal Reserve will trade).

What does it mean to say “the Fed is raising the interest rate?”

Wednesday, September 23rd, 2009

At any given time, there are countless different interest rates for countless different transactions at countless different institutions. The government doesn’t control all of them – how could it? But then how can you say the Fed has raised or lowered interest rates?

The Fed, or the Federal Reserve, is the whole country’s bank. It operates out of 12 different locations and it lands money to commercial banks, which in turn land money to us. The Federal Reserve Board is the agency that controls this bank and its job is to maintain a secure financial system throughout the country. The Fed’s primary concern is to regulate our economy’s rate of growth – if the economy grows too quickly, we get swamped by inflation, and if it grows too slowly, we could enter a recession.

Because the Fed lands money to all other banks, its interest rate affects all other interest rates, which adjust to accommodate the Fed’s behavior. So when the Fed decides the economy is growing too fast, it raises its own interest rate – raising all other interest rates in a kind of domino effect – and slows down spending that way. If the Fed wants to try to increase economic growth, it lowers its interest rate, which usually increases spending. While interest rates can vary from institution to institution, they’re all proportional to the country’s most important interest rate: the Federal Reserve’s.

How Much Power Should We Give The Fed?

Tuesday, August 18th, 2009

How big should government be? Below, the Fed chairman’s arguments for why, when it comes to consumer protection, bigger is better.

  • Federal Reserve chairman Ben S. Bernanke has been spurring debate about the Fed’s proper role, arguing that it is necessary to give the government more authority.
  • Bernanke wants the Fed to maintain control over consumer lending, an opinion which differs from the policies of the Obama administration.
  • Many officials are skeptical of this plan, arguing that the government is already spread too thin, and that it cannot possibly become a successful systemic risk regulator.

Facts & Figures

  • Bernanke’s plan requires the government to examine the possible dangers posed not just by companies themselves, but by their connections to other corporations.
  • The Fed would also require big corporations to keep debt low or capital high, restricting them to a manageable size and increasing competition.
  • The government would be granted the authority to seize any institution it deemed too great a danger to the financial system.

Best Quote

“…[T]here’s got to be somebody who is responsible not just for monitoring the health of individual institutions, but somebody who’s monitoring the systemic risks of the system as a whole. And we believe the Fed has the most technical expertise and the best track record in terms of doing that.” – Barack Obama

The Federal Reserve is…

Wednesday, August 5th, 2009

The Federal Reserve (or “the Fed”) is the government agency that sets monetary policy, which means they try to control inflation and affect people’s spending habits by changing interest rates. The Fed also controls the discount rate, which is an interest rate that makes it cheaper or more expensive for banks to borrow and lend money.