Federal Reserve

It is the primary bank in the United States; in other nations, it is known as the Central Bank. It is the single most dominant force in the American and global economies. It serves five critical roles in order to keep the US economy stable and effective (Reserve, 2005). Among these services are the following:

To begin, it manages the country’s monetary policies in order to promote long-term interest rate stability, full jobs, and stable prices. Second, it works to ensure the financial structure’s resilience and to reduce and contain global threats by constantly controlling and engaging the financial markets on a local and global scale. Third, the Federal Reserve supervises private financial institutions to uphold safety and soundness of such systems particularly their impacts on the entire system. Fourthly, it promotes settlement systems and payments safety by the U.S government and the banking sector through facilitations of transactions of the United States dollar. Finally, the Federal Reserve works to promote consumer safety and community development through consumer-oriented evaluations, research, development, and analysis of consumer trends and emerging issues, enactment of consumer laws and regulations, community development projects, etc.

II. Interest rates

a. Why raise/lower interest rates

The Federal Reserve alters interest rates regularly to ensure that the economy operates at an optimum state. When the economy is a depression or very low, the central bank can decide and thus make credit readily available to businesses, consumers, home buyers, etc. In case the economy is rapidly growing, the Federal Reserve will increase rates of interest, to slow down the economy and ensure that it grows at manageable and stable rates (Reserve, 2005).

b. Economic reactions to interest rates changes

Alterations in rates of interest generate a series of reactions. When interest raises are increased, the commercial banks equally increases their rates of interest which subsequently affects consumer loans, business loans, car loans, interest rates for a mortgage. It is worth noting that commercial banks and other financial institutions may lower or raise their prime rates before the Federal Reserve alters the borrowing rates. In the same manner, when the Federal Reserve reduces borrowing rates, commercial banks should reduce their lending rates. In such case, mortgage, car, business and consumer loans become more affordable. Business activities in the economy go up, and the economy expand (Dennis, 2006).

III. Federal Reserve response to economic downturns

According to Jovanović and Zimmermann (2008), the U.S central bank responds to an economic recession in some ways. The Federal Reserve can lower or raise borrowing rates depending on the economic environment. Besides, it can sell and purchase the American government debt through treasury notes and bills. Also, the Central Bank can provide cheap loans to commercial banks. The measures as explained above aid in restoring the economy back to stability.

Conclusion

Getting the economy out of a recession is primarily centered on investment. Investments are stimulated through government activities to increase money circulation. As highlighted above, the government need to engage in activities which ensure availability of money to the public for investment. Investment provides that there is increased production, which is enhanced by companies being able to hire more workforce. On the other hand, availability of funds increased demand for goods and services thus providing the market with more products produced by various industries. Nevertheless, the Federal Reserve should keenly watch on economic pattern to ensure that inflation is checked to keep it at modest rates

References

Reserve, F. (2005). The Federal Reserve System: Purposes and Functions. hp://www. federalreserve. gov.

Dennis, R. (2006). The policy preferences of the US Federal Reserve. Journal of Applied Econometrics, 21(1), 55-77.

Jovanović, M., & Zimmermann, T. (2008). Stock market uncertainty and monetary policy reaction functions of the Federal Reserve Bank. RUB, Department of Economics.