ECO 561 Week 5, DQ 2 Federal Reserve

What does the Federal Reserve take into account when establishing general and specific rates of interest? Describe the recent tools the Federal Reserve has used to influence the U.S. economy, and explain their effects. In your opinion, have these measures been effective or ineffective in addressing the major concern or concerns of the business cycle?

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There are several factors that are taken into consideration when the Federal Reserve specific rates of interest. There is a distinction between specific interest rates and interest rates in general. A specific interest rate reflects the time for which the money is on loan, the risk that the money may not be paid back, and the current demand and supply of the market place. Specific interest rates include treasury or corporate bonds. Those are set in dealer markets between the buyers and sellers and are called market rates. These rates are subject to change daily. The Federal Reserve takes into account the condition of the economy when establishing any interest rate. When the economy is slow, the Federal Reserve will lower the interest rates to increase lending and hope to rebuild the economy.

When the economy is beginning to grow, consumers will have full employment and savings through banks, and when consumers have more money they are willing to finance or purchase more things such as a house or a car. As the demand for funds increases then the Federal Reserve will increase interest rates, and when the demand for funds decreases then the Federal Reserve will drop the interest rates. When establishing general and specific rates of interest the Federal Reserve will also take into account inflation, international forces, and the value of the dollar. Inflation affects the interest

 

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