Federal Reserve Case Study

This role is achieved through the implantation of the monetary policies. According to Arnold (2008), Fed has several tools at it disposal that it uses in the monetary polices. These are; the open market operations which involve buying and selling U.S government securities in the financial markets. Further the bank is charged with the responsibility of determining the required reserve ratio. This ratio is given to the commercial banks dictating the minimum amounts that they should hold in to their accounts as deposits and for lending. Finally the Fed sets the discount rates putting in to consideration the overall market rates s well as desired effect on borrowing that the Fed seeks to achieve. In addition to these three major roles, as a bank, the Federal Reserve Bank can play the roles played by the commercial banks as the rules are not entirely prohibitive as far as this duty is concerned.

Even before the creation of the Federal Reserve, banks were used by the public just as we use them today. Deposits were made into savings accounts. Loans were taken out to mortgage a home or finance a new business. Banknotes were issued and spent when the public borrowed from the banks. Borrowers spent these banknotes just as paper money is spent today. These bank notes were valued as money since they were backed by the promise that they would be exchanged on demand for either gold or silver.

For this assignment I picked “the role of the Federal Reserve” a mere recital of the economic policies of government all over the world is calculated to cause any serious student of economics to throw up his hands in despair (pg, 74). The Federal Reserve is now in the business of enforcing the United States government’s drug laws, even if that means making a mockery of both state governments’ right to set their drug policies and the Fed’s governing statutes. A Federal Reserve official who played a key role in the government 's response to the 2008 financial crisis says the government should do more to prevent a repeat of that crisis and should consider whether the nation 's biggest banks need to be broken up. Neel Kashkari says he believes the most major banks still continue to pose a "significant, ongoing" economic risk. The next ten years will see an explosion of government debt and an implosion of government’s ability to fulfill its promises. Any economic or investment model based on past performance under previous economic conditions will be worthless just as useless as the Federal Reserve’s models.

The Federal Reserve System was founded by Congress in 1913 to be the central bank of the United States. The Federal Reserve System was founded to be a safer, more flexible, and more stable monetary financial system. Over the years, the role of the Federal Reserve Board and its influence on banking and the economy has increased. Today, the Federal Reserve System's duties fall into four general categories. Firstly, the FED conducts the nation's monetary policy. The FED controls the monetary policy by influencing credit conditions in the economy. The FED measures its success in accomplishing these goals by judging whether or not the economy is at full employment and whether or not prices are stable. Not only

To stabilize the economy bonds are used which release money into the market. The responsibility of the Central Bank is to maintain the health of the banking system and regulating the purchase and sale of bonds. The interest rates are controlled to balance the markets. According to the Monetary Policy Report to Congress, “The Federal Open Market Committee (FOMC) maintained a target range of 0 to ¼ percent for the federal funds rate throughout the second half of 2009 and early 2010” while representing forecasted economic decisions to rationalize low levels for longer times on the federal funds rate (Federal Reserve, 2010). Purchases were still being made by the Fed’s to result in improvements to the economy through focusing on mortgages, the real estate market, and the credit market. Predictions by the Federal Open Market Committee depicted low levels on the federal funds rates in early 2010 which would continue for some time while over time the economy would see growth, a rise in inflation, and a decline in unemployment. Feds were in agreement though they expected the recovery process to be slower. Purchases by the Federal reserve were slowed, “$300 billion of Treasury securities were completed by October” and “the purchases of $1.25 trillion of MBS and about $175 billion of agency debt” were suppose to be finished the first quarter of 2010 (Federal Reserve, 2010).

What the world needs now is Money Sweet Money"; that is not the way the song goes however that is surely the way our world and economy does. Money and its importance relative to the US Government have always been difficult to figure out especially when it comes to interest rates. Due to our Federal Reserve System, its chairman Alan Greenspan, and his Board of Governors dedicated to seeing that our economy blossoms, those doubts have become a thing of the past, for now.

The Federal Reserve System regulates the economy of the United States through monetary policy. For instance, the “Fed” keeps the federal fund rate low to provide lower mortgages, increases investments, and boosts the economy. Alternatively, the Fed manages the economy when the opposite effects take place. When the federal fund rate is high the mortgages increase, reduces investments, and will slow the economy, which means the Fed has to manipulate the interest rates and try to shape economic potentials for the future. There are 12 regional Federal Reserve Banks in the Federal Reserve System which rely on an intrinsic technological infrastructure to keep the member banks connected and all data comprised from all regions backed-up in-case of

This essay’s purpose is to write my personal experience of my visit to The Federal Reserve Bank. After Professor Berch has announced the details for this tour, I searched the website of the bank to plan my visit. There were 10 available spaces and I thought why not bring my family members. I got four tickets including me, my mom and my two sisters.

Inflation has been below the Federal Reserve’s target for more than 3 and a half years. Inflation is expected to keep declining under desired target as long as the oil prices are declining as well. “Yield movements in the Treasury inflation-protected securities, or TIPS, market indicate that compensation for inflation expected in five to 10 years has dropped to 1.56% annually, according to Barclays. That is down from 1.67% when the Fed raised short-term rates in December. Moreover, it is down from 2.5% two years ago” (Leubsdorf). If less inflations is expected in the future, it could change the way people are spending their money, but if they assume that the inflation is going to keep increasing, the prices are more likely to keep rising at a faster pace.

Foreign currencies are an asset to the Fed. The Fed controls the foreign-exchange rate of its currency to foreign currencies by buying and selling foreign currency. When the dollar is too strong on foreign currency on the Fed's view, and they want the U.S. dollar to be weaker, and then the Fed will sell U.S. dollars and buy foreign currency. This transaction causes the monetary base to increase. However, in order to sterilize the effect of intervention on the supply of Federal Reserve balances, the FOMC would then sell an equal amount of U.S. Treasury bills for cash in the open market to raise the supply of balances back to its former level. The operations have no net effect on the level of foreign currency balances at the foreign central bank

As per the recent news, the Federal Reserve may postpone raising US interest rates for the first time in nine years, as extended low inflation goes on to weigh on the economy.

Ariel (1990) documents that the average preholiday return for the period from 1963-1982, using both the CRSP value-weighted and equally weighted index, is nine to 14 times higher than the mean return on the remaining days. Using a nighty years worth of data (1897-1986), Lakonishok and Smidt (1988) conclude that the preholiday rate of return is 23 times larger than the regular daily rate of return. Liano el al. (1992) provides an evidence of the presence of the holiday effects in OTC market. Finally, all previous studies document that pre-holiday returns are not a manifestation of other calendar anomalies.

H21: The risk adjusted return of the stock price of the sample of investment firms is significantly negatively affected around the event date as defined by the event period This study uses the standard risk adjusted event study methodology to test the stock market’s response to the Lehman Brothers Bankruptcy on September 15, 2008. Using Yahoo Finance, I found the historical stock prices for the 15 firms and the S&P 500 index during the event study period. The event study period involved 180 days prior to the event and 30 days after, using day 0 as the event date. Using those prices, I calculated the holding period returns for the companies (R) and the corresponding S&P 500 index (Rm) for each day using the formula: Current daily stock return= (current day close price – previous day close price) previous day close price Current daily index return= (S&P current close- S&P previous close) S&P previous close A regression analysis was then performed using the actual daily return of each company (dependent variable) and the corresponding S&P500 index daily return (independent variable) over the pre-event period day -180 to -31 period prior to the event period of day –30 to day +30) to obtain the alpha (the intercept) and the beta (standardized coefficient). Table 1 shows alphas and betas for each firm.

The upper limit for the expected time should not be exceeded by 45 days. The assumptions of stable government policies, economic conditions may not hold true after 45 days.

In Part B, we fit symmetric and asymmetric volatility models in this part. Firstly,after testing the stationarity of “drcons”, we compare ARMA(1,1), ARMA(1,2), ARMA(1,3), ARMA(2,1), ARMA(2,1), ARMA(2,3) ARMA(3,1), ARMA(3,2), and ARMA(3,3), finding the best fitted ARMA model. Then, we test heteroscedasticity for the series and fit the symmetric