current federal budget

The Federal Reserve 's Current Monetary Policy

The Federal Reserve uses interest rates as a tool to influence economic activity . The funds rate , which is the interest that banks charge each other on overnight loans , happens to be the Federal Reserve 's primary tool , seeing that this rate affects several other interests rates charged to consumers and to businesses (Associated Press , 2006 Furthermore , it is the funds rate that the Federal Reserve is currently focused on in terms of its monetary policy , rather than the discount rate and reserve requirements which remain

as essential to the Federal Reserve as before in terms of formulating monetary policy . The reason for the Federal Reserve 's focus on the funds rate is , no doubt , that it is the need of the hour to have such a focus (Bernanke , 2007

Fox News reported in May 2006 that Federal Reserve policymakers had raised the funds rate in the face of an expected increase in inflation (Associated Press . Given that raised rates of interest are expected to reduce consumer spending as well as capital investment , thereby reducing demand as well as prices , the Federal Reserve hoped to control inflation through the use of its primary tool of influencing economic activity Hence , whenever the Federal Reserves expects the rate of inflation to rise , the economy can expect a raise in interest rates . The increase in interest rates is in turn expected to slow down economic activity in the nation . While slowing down economic activity is not a good idea economists believe that high inflation could get even worse

On the contrary , whenever the Federal Reserve expects a recession to set in , its policymakers will reduce the rates of interest in to make it more attractive for consumers to make purchases , and for businesses to invest in capital . However , dramatic declines in interest rates do

THE FEDERAL RESERVE 'S CURRENT MONETARY POLICY

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not always lead to increases in spending and investment . In May 2002 USA Today reported that this is exactly what had happened in the American economy . Reduced interest rates did not increase spending and investment . Instead , they reduced the interest income of American families , thereby hastening the onset of recession (Kane . Of course the recession and the low interest rates were accompanied by the inverted yield curve . This is because long-term investors had settled for lower yields by assuming that the economy as well as rates of interest were going to go even lower in the future (The Living Yield Curve , 2007

In December 2006 , it was reported that the Federal Reserve would keep the interest rates unchanged for a long while , perhaps through most of 2007 . This is because the economy is showing mixed results at present . Inflation is high , and so the Federal Reserve could have reduced interest rates to defeat the problem . All the same , decreased economic activity of the housing market has slowed down the rate of economic growth (Idaszak and Goldstein , 2006 . A slowing of the rate of...