Federal Funds Rate Changes example essay topic

Chairman of the Board Created in 1913 by the government, the Federal Reserve System a. k. a. "the Fed", was created to control the previously unregulated backing system. There's a central Board of Governors in Washington, D.C. and 12 regional Federal Reserve Banks. There is also the Federal Open Market Committee, responsible for the changed in interest rates. Made up of seven members, the Board of Governors members are first appointed by the president, and confirmed by the Senate for their fourteen year term. Led by a chairman and a vice chairman, each are appointed by the president for four-year terms. Alan Greenspan took office June 19, 2004, for a fifth term as Chairman of the Board of Governors of the Federal Reserve System.

Dr. Greenspan also serves as Chairman of the Federal Open Market Committee, the system's principal monetary policymaking body. He originally took office as Chairman and to fill an unexpired term as a member of the Board on August 11, 1987. Dr. Greenspan was reappointed to the Board to a full 14-year term, which began February 1, 1992, and ends January 31, 2006. He has been designated Chairman by Presidents Reagan, Bush, Clinton, and Bush. A greater part of the duties of the Fed are carried out by the regional Federal Reserve Banks, which regulate and audit banks, similar institutions, hold reserves for national and state banks, operate as banks for the federal government, distribute currency to banks and similar institutions, clear checks for member banks and administer laws pertaining to consumer credit protection. Member banks include all national banks and state-chartered banks that choose to join the Federal Reserve System.

The real power of the Fed is its influence over monetary policy. The Federal Open Markets Committee meets eight times a year to make decisions on short-term interest rates, especially the federal funds rate. By law is that the Fed is supposed to promote maximum employment, stable prices and moderate lone-term interest rates. The Fed's has three main tools. Setting the federal funds rate, which is what banks pay each other for overnight loans.

The committee sets a target for this rate, but not the actual rate itself. When the news media report that the Fed changed interest rates, it's the federal funds rate that is being referred to. The second tool is the discount rate, which is what banks pay to borrow money from a Federal Reserve Bank. This is usually lower than the federal funds rate, but the two are closely tied.

The third tool is the reserve requirement. This is a percentage of deposits that all banks must hold in reserve and cannot loan out. This rate is usually around 10 percent, but it can change from time to time. This is a very powerful tool, but it is rarely used. Banks borrow from and lend to each other routinely in order to make sure they meet their reserve requirements.

When the Fed changes the federal funds rate, it makes those loans among banks more or less expensive. And over time that can impact every interest rate that banks charge their customers. If the Federal Open Market Committee, FOMC, is concerned about inflation and wants to cool down the economy, it does so by increasing the federal funds rate. This eventually makes it more expensive for businesses and consumers to borrow money and thus slows down economic activity. If instead the Fed wants to stimulate the economy, it does so by reducing the federal funds rate, making it easier for banks to lend money and for consumers and businesses to borrow.

Changes in the federal funds rate have a ripple effect on other rates. Interest rates influence each other. Long-term rates tend to go up and down together, and short-term rates tend to go up and down together. So when banks suddenly have to pay less for very-short-term money, as in overnight loans, they generally pass the savings on to their customers in the form of lower short-term rates.

Conversely, when the federal funds rate goes up, banks quickly pass the added cost on to their customers. This is why banks' prime rate, which is a benchmark for many loans, usually moves up or down quickly after changes in the federal funds rate. The changes gradually work their way into longer-term rates such as for car loans and fixed-rate mortgages and corporate bonds. Because of the time this takes, many economists believe federal funds rate changes don't work their way through the economy for about six months. When the Fed changes interest rates, the news is often reported by measuring the change in something called 'basis points.

' One basis point is equal to one-hundredth of 1 percent. Dr. Greenspan was born on March 6, 1926, in New York City. He received a B.S. in economics (summa cum l aude) in 1948, an M.A. in economics in 1950, and a Ph. D. in economics in 1977, all from New York University. Dr. Greenspan also has performed advanced graduate study at Columbia University. From 1954 to 1974 and from 1977 to 1987, Dr. Greenspan was Chairman and President of Townsend-Greenspan & Co., Inc., an economic consulting firm in New York City. From 1974 to 1977, he served as Chairman of the President's Council of Economic Advisers under President Ford, and from 1981 to 1983, as Chairman of the National Commission on Social Security Reform.

Dr. Greenspan has also served as a member of President Reagan's Economic Policy Advisory Board, a member of Time magazine's Board of Economists, a senior adviser to the Brookings Panel on Economic Activity, and a consultant to the Congressional Budget Office. His previous Presidential appointments include the President's Foreign Intelligence Advisory Board, the Commission on Financial Structure and Regulation, the Commission on an All-Volunteer Armed Force, and the Task Force on Economic Growth. Before his appointment to the Board, Dr. Greenspan served as a corporate director for Aluminum Company of America (Alcoa); Automatic Data Processing, Inc. ; Capital Cities / ABC, Inc. ; General Foods, Inc. ; J.P. Morgan & Co., Inc. ; Morgan Guaranty Trust Company of New York; Mobil Corporation; and The Pittston Company.

His non corporate positions have included Member of the Board of Trustees, The Rand Corporation; Director, Institute for International Economics; Member of the Board of Overseers, Hoover Institution (at Stanford University); and Vice Chairman and Trustee, Economic Club of New York. Dr. Greenspan has served as Chairman of the Conference of Business Economists, President and Fellow of the National Association of Business Economists, and Director of the National Economists Club. Dr. Greenspan has received honorary degrees from Harvard, Yale, Pennsylvania, Leuven (Belgium), Notre Dame, Wake Forest, and Colgate universities. His other awards include the Thomas Jefferson Award for the greatest public service performed by an elected or appointed official, presented by the American Institute for Public Service, 1976 (joint recipient with Dr. Arthur Burns and William Simon); election as a Fellow of the American Statistical Association, 1989; decorated Legion of Honor (Commander) France, 2000; honorary Knight Commander of the British Empire, 2002; and he was the first recipient of the Gerald R. Ford Medal for Distinguished Public Service, 2003.