Conclusion about the economy
The conclusion made after the April 27th FOMC meeting is that the interest rates paid were to be left unchanged while the excess reserves balances will be charged a 0.50 percent. In addition, as a decision policy, the board voted towards authorizing and directing the Open Market Desk at New York’s Federal Reserve Bank and until further instructions are given, the transactions will be executed in the System Open Market Account. This will be in accordance with the domestic policy directive that was earlier initiated. Ensuring that interest rates are not increased will foster economic development as firms and households can save and borrow cash from lending institutions for investment.
The Federal Open Market Committee projects that the inflation, in the end, will average 2 percent. The projections made by the committee are in line, as the Cleveland’s Federal Reserve Bank projections for the next ten years will average 1.71 percent. Thus, the public should expect that within the coming decade will tend towards 2 percent on average over the coming decade. The current rate of inflation is not going to hurt the economy much as firms and households will be preparing for it through making adjustments accordingly.
As from 28th April this year, the FOMC directed that OMD would undertake necessary open market operations to sustain the federal funds rates around 0.25% to 0.5% target range. The proposed target is inclusive of the overnight reverse operations of repurchase at a 0.25% offering rate. The rate is in amounts that are only limited by Treasury security values
The Federal Reserve’s is that interest rates will be left unchanged to avoid affecting the monetary policy. Fixed interest rate is an indication that the economy is operating near normal, and there is no need to expand or contract the monetary policies through using interest rate.
The Financial Services Regulatory Act of 2006, Dodd-Frank Wall Street Reform, and Consumer Protection Act enacted in 2009 are pieces of banking legislation that have significantly affected the structure of the banking industry. The Act mainly authorized interest payment on all the balances that are held at the Federal Reserve Banks. The second Act led to the implementation of significant transformations affecting the supervision and oversight of the financial institution as well as systemically important financial firms.
Types of banking regulation include government safety net, capital requirements, and disclosure requirements. Government safety net prevents financial institutions from going bankrupt. Under capital requirements, the regulation ensures that financial institutions fulfill what regulators mandate. Lastly, disclosure requirements ensure that all the assets held disclosed to given enumerated individuals (Mishkin).
Government safety net is the action taken by the government to assist financial institutions and companies that are posed with financial difficulties. The safety net is useful as it prevents corporations and financial institutions from going into bankruptcy. Too big, to fail means that if a financial institution is too big regarding profit turnover, it is not likely to fail. To bankers, too big, to fail has some form of risk and on the other side; regulators have to implement strategies to safeguard the financial institutions that are termed as too big to fail (Salami).
Regulations regarding are the policies, laws, and acts set to serve and govern particular organizations, firms, or industries. The prompt corrective action is a law implemented in the United States that mandates progressive penalties against financial institutions that show progressive diminishing capital ratios. The capital requirement is the amount of capital financial institutions or banks are supposed to hold as required by their financial regulators. Chartering and examination are the requirements supposed fulfilled by banks to reduce new financial institution entrants by limiting existing competition. Disclosure regulations provide that when an individual is acting on behalf of it, discloses the physical nonpublic information to given enumerated individuals. Risk valuation is the process where hazards are identified. The risks related to the hazard are analyzed and evaluated.
The major provisions of Dodd-Frank Act are Title VII and Title IX. Title VII fosters creation of a comprehensive regime to regulate over the counter derivative market. The title demonstrates the importance of financial fundamentals on a large scale through addressing the derivatives market with a worldwide 650 trillion dollars notional value. On the other hand, the provisions of Title IX directly affect our lives. This is unlike the provisions of Title VII. There is a designated section for protection, which limits practices that are bound to affect individual investors or specific participants in financial institutions.
Comptroller of currency ensures there is soundness and safety of a country’s banking system, fosters competition through permitting banks to offer new services and products, providing fair as well as equal access to banking services and improving the effectiveness and efficiency of OCC supervision. FDIC insures the deposits in savings and banking institutions in case of bank failure, supervises and examine all the banks that are state-chartered and are not FRS members, and fosters clientele confidence in lending institutions. The Federal Reserve conducts the country’s monetary policy, provides financial services to the United States government, supervises, and regulates banks and other lending-related financial institutions. The banking commission approves banks that are supposed to hold city deposits.
Independent Federal Reserve is a United States central bank that acts independently but it accountable to the Congress and the public. The case for is that its independence enables it to operate efficiently and effectively to solve the economic crisis and the case against is that it is only open to suggestions from the Congress (Eicher and García-Peñalosa). The congress can control the actions of Federal Reserve Bank. Before a policy is implemented, it has to be accessed and approved by the congress.
Instrument independence means that the government does not control the institution or body. The goal of independence is to ensure that the policies made are not going to be influenced by interests of individuals mainly those in the political arena (Leclaire, Jo, and Knodell). Federal Reserve enjoys both of these.
The checkable deposits in the banking system in this case increase. The factors overlooked are bank reserves and money deposits. The value of the multiplier is 1.45. Reserves are the components that have changed significantly in last year.
The approach used by Federal Reserve has changed considerably since the financial crisis, which is since late 2008. The FOMC came up with a close to zero target range for the entire federal funds rate. The federal reserve expanded holding of long-term securities via purchases in open markets with an objective of narrowing down pressure on interest rates to foster economic activities that would lead to job creation through making financial institutions more accommodative. The traditional tool employed by Federal Reserve is open market operations in an attempt to support the functioning of credit markets.
This does not create any problem as the reason why Fed was put in place is to act and offer support through acting as the lender of last resort.
Credit easing entails expansion together with focusing on the balance sheet’s asset side of Federal Reserve. Quantitative easing is a monetary policy where the central bank buys securities in the market to decrease rates of interest and increase the money supply in the economy (Kagami and Tsuji).
The open market operation is a traditional tool used by Fed. Large-scale asset purchases in a form of unconventional monetary policy that aims at lowering interest rates to boost economic growth. The second one is forward policy guidance, which is meant to act in a similar manner and enhance economic growth.
Work cited
Eicher, Theo S, and Cecilia García-Peñalosa. Institutions, Development, and Economic Growth. Cambridge, Mass.: MIT Press, 2006. Print.
Kagami, Mitsuhiro and Masatsugu Tsuji. Privatization, Deregulation and Economic Efficiency. Cheltenham, UK: E. Elgar, 2000. Print.
Leclaire, Joëlle Julie, Tae-Hee Jo, and Jane Ellen Knodell. Heterodox Analysis of Financial Crisis And Reform. Cheltenham: Edward Elgar, 2011. Print.
Mishkin, Frederic S. The Economics Of Money, Banking, And Financial Markets. Reading, Mass.: Addison-Wesley, 1998. Print.
Salami, Iwa. Financial Regulation in Africa. Farnham: Ashgate Publishing Ltd, 2012. Print.
