How Fed Works Research Paper
How the Fed Works by Lee Ann Obringer
Federal Reserve building, Washington, D.C.
One of the more mysterious areas of the economy is the role of the Fed. Formally known as the Federal Reserve, the Fed is the gatekeeper of the U.S. economy. It is the central bank of the United States -- it is the bank of banks and the bank of the U.S. government. The Fed regulates financial institutions, manages the nation's money and influences the economy. By raising and lowering interest rates, creating money and using a few other tricks, the Fed can either stimulate or slow down the economy. This manipulation helps maintain low inflation, high employment rates, and manufacturing output.
In this article, we'll visit the mystical world of the Fed …show more content…
It is this connection between the required reserve amount and the amount of money a bank can lend that allows the Fed to influence the economy. If the reserve requirement is raised, then banks have less money to loan and this will have a restraining effect on the money supply. If the reserve requirement is lowered, then banks have more money to loan.
Reserve money is used to process check and electronic payments through the Federal Reserve and to meet unexpected cash outflows. These reserves can be held as "cash on hand," as a reserve balance at a regional Reserve Bank, or both.
Although the Fed has the power to do so, changing the amount of reserve cash a bank has to have can have dramatic effects on the economy; for this reason, this tool is rarely used. The Fed more often alters the supply of reserves available by buying and selling securities. When the Fed sells securities, it reduces the banks' supply of reserves. This makes interest rates go up. When the Fed buys securities, it increases the banks' supply of reserves. This makes interest rates go down.
All of this buying and selling is referred to as open market operations (discussed …show more content…
It is produced each month by the U.S. Department of Labor's Bureau of Labor Statistics and also includes information about the total number of hours worked and hourly wages earned by workers. It is helpful to the FOMC as an economic indicator because it indicates the pace (or changes in the pace) of economic growth. The average hourly earnings number also shows trends in supply and demand.
S&P Stock Index - The Standard & Poor Index shows the FOMC the changes in price in a very wide variety of stock. S&P compiles the index daily. The value of watching this index as an indicator of the economy is that it often indicates the confidence consumers and businesses have in the economy. If the market is rising, then investments and spending will rise; if the market is low or falling, then investments and spending will also slow down.
Industrial Production/Capacity Utilization - This measures industrial output both by product and by industry. It is compiled by the Board of Governors each month and is useful because it tells the FOMC about the current growth of the Gross Domestic Product. By understanding the level of capacity utilization, the FOMC can understand how well resources are being utilized. All of this can indicate future changes in the rate of
Federal Reserve building, Washington, D.C.
One of the more mysterious areas of the economy is the role of the Fed. Formally known as the Federal Reserve, the Fed is the gatekeeper of the U.S. economy. It is the central bank of the United States -- it is the bank of banks and the bank of the U.S. government. The Fed regulates financial institutions, manages the nation's money and influences the economy. By raising and lowering interest rates, creating money and using a few other tricks, the Fed can either stimulate or slow down the economy. This manipulation helps maintain low inflation, high employment rates, and manufacturing output.
In this article, we'll visit the mystical world of the Fed …show more content…
It is this connection between the required reserve amount and the amount of money a bank can lend that allows the Fed to influence the economy. If the reserve requirement is raised, then banks have less money to loan and this will have a restraining effect on the money supply. If the reserve requirement is lowered, then banks have more money to loan.
Reserve money is used to process check and electronic payments through the Federal Reserve and to meet unexpected cash outflows. These reserves can be held as "cash on hand," as a reserve balance at a regional Reserve Bank, or both.
Although the Fed has the power to do so, changing the amount of reserve cash a bank has to have can have dramatic effects on the economy; for this reason, this tool is rarely used. The Fed more often alters the supply of reserves available by buying and selling securities. When the Fed sells securities, it reduces the banks' supply of reserves. This makes interest rates go up. When the Fed buys securities, it increases the banks' supply of reserves. This makes interest rates go down.
All of this buying and selling is referred to as open market operations (discussed …show more content…
It is produced each month by the U.S. Department of Labor's Bureau of Labor Statistics and also includes information about the total number of hours worked and hourly wages earned by workers. It is helpful to the FOMC as an economic indicator because it indicates the pace (or changes in the pace) of economic growth. The average hourly earnings number also shows trends in supply and demand.
S&P Stock Index - The Standard & Poor Index shows the FOMC the changes in price in a very wide variety of stock. S&P compiles the index daily. The value of watching this index as an indicator of the economy is that it often indicates the confidence consumers and businesses have in the economy. If the market is rising, then investments and spending will rise; if the market is low or falling, then investments and spending will also slow down.
Industrial Production/Capacity Utilization - This measures industrial output both by product and by industry. It is compiled by the Board of Governors each month and is useful because it tells the FOMC about the current growth of the Gross Domestic Product. By understanding the level of capacity utilization, the FOMC can understand how well resources are being utilized. All of this can indicate future changes in the rate of