Alroy Commentary - Understand one of the most important Central Bank in the World – U.S. Federal Reserve
Even you are not familiar with the financial market, most of you still know Ben Bernanke and Alan Greenspan, current and ex-chairman of U.S. Federal Reserve. U.S. Federal Reserve is one of the most important Central Bank in the world, but do you know why it is so important and how it operates?
U.S. Fed is founded by U.S. Congress in year 1913. The objectives of U.S. Fed are to maintain stable prices as well as maximum employment, along with moderate long-term interest rates. To achieve these objectives, three main tools of monetary policy are used to influence the amount of reserves in private banks. They are open market operations, discount rate and reserve requirements.
Among all of them, U.S. Fed implements monetary policy largely by targeting the federal funds rate. This is the interest rate banks charge one another for overnight loans, and usually acts as a tool to control money supply. The Federal Reserve requires banks to keep a certain amount of cash, they may borrow short-term funds in order to prevent lacking sufficient reserves. As a result, a higher federal funds rate makes banks more reluctant to borrow loans. They will either lend out less money or lend money with higher rate to offset the federal funds rate.
On the other hand, business leaders also change their decisions after a sudden change in interest rate since it may affect their balance sheets, profitability, future sales, hiring plans and capital spending projects. Moreover, consumers are influenced as well since shifts in monetary policy affect short-term rates like those for bank deposits, credit cards, mortgages and loans. U.S. Fed can adjust the economic pulse of the country finally.
The Federal Open Market Committee (FOMC) formally schedules eight regular meetings a year and issues a statement on the results of its deliberations.
As U.S. is the biggest economy in the world, expansion or contraction of U.S. economy can have a multiple impacts to the global economies. That’s why investors and businessmen always monitor the decision and speech from the officials in U.S. Federal Reserve closely and U.S. Federal Reserve is the most important Central Bank in the world.
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