Open Market Rate : The Fed's Target Rate

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Federal funds target rate graph Source: Author’s own work using data from Z.1 releases, 2015 From the above graph, the Fed’s target rate was on an upward trend in the year preceding the financial crisis and leveled off immediately before the crisis and then went on a downward spiral trend as the Fed passed policies to ensure low borrowing rates to encourage investments and discourage savings, to stir economic growth. Reserve requirements, which refers to mandatory deposits that commercial banks must hold in cash either at reserve bank or in vaults, is another tool used by The Fed to achieve its monetary objectives. A decrease has expansionary effects while an increase has contractionary impact on level of money supply in the economy.…show more content…
Graph of levels of inflation against the fed interest rate changes over the past 10 years The 10-year breakeven inflation point The Target inflation rates over the past 10 years Source: Author’s own work using data from Z.1 releases, 2015 The graph shows effective inflation rates which had moderate variations immediately before the global financial crisis and sank to low levels during the crisis. The upward trend was occasioned by the decision of the Fed to hold rates at ultra-low levels immediately after the global financial crisis. Effects of the credit system Feds reserve regulation and financial stability policies Regulation of the economy is very critical because any economy is susceptible to the fundamental mismatch that can possibly lead to negative externalities in demand for liquidity, which include bank runs and credit cycles. In a well-functioning economy, there should be easy access of money-like instruments (safe assets) to promote liquidity. Safe assets refer to highly liquid assets which can be easily converted into cash without affecting the financial value of the asset. Further, there must be a platform for facilitating creation and exchange of securities, thus creating assets and liabilities (credit system) for the market players. Asset holders expect a return on holding assets because of the risks they assume by holding the liquid assets. However, producing
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