The Federal Reserve plays an integral part of the US financial system. This study identifies factors that affect the way this organization adjusts discount rates in order to monitor the nature of the money supply to the market. The study shows that the banks have to adjust to lower rates of discounting with an aim of making reasonable profits from the public and corporate when the Fed decreases the discount rates. Evidently, the Fed manages to keep a balance of the monetary supplies in the market through maintenance of stable state levels of discounts.
United States Federal Reserve System
Factors that influence the Federal Reserve in adjusting the discount rate
Interest rates are charged for loans to commercial banks. In accordance to the rules and regulations of the Federal Reserve, this is a principle that can be used as a means of controlling the money supply. An increase in the level of the money supply is achieved when the Federal lowers the rates of discount. A decrease for money supplied is achieved by raising the amounts of loans issued by the Federal Reserve. The board of governors is subject to scrutiny and approval of the levels of discount rates that are set by the Federal Reserve. The Federal Reserve does not work on its own. It operates under strict guidance from the board of directors within the organization. The decisions made by the board of governors through the Federal Reserve are directed at maintaining the rates of discount and not the amounts of money supplied to the markets. Nonetheless, the Fed makes use of the discount rates in order to monitor the nature of the money supply to the market (Brown, 2008).
How the discount rate affect the decisions of banks in setting their interest rates
The rates of discounts are effectual to the decisions made by the banks. The aims of the banks are directed at making a profit from any way possible. The methods used by the Fed are rudimentary to the amounts of profit made by the banks. For instance, when the Fed increases the interest rates, this forces the banks to up their rates of interest in order to register margins of profit and growth in the market. On the other hand, when the Fed decreases the discount rates, the banks have to adjust to lower rates of discounting with an aim of making reasonable profits from the public and corporate. The control of the rates of interests is the main activity that is monitored by the Federal Reserve. In order to attain an equitable supply of money, the system has to make several considerations that are directed at influencing the rates of interests applied by the banks (Wells, 2004).
From the reserve ratios, banks are expected to keep a given proportion of their deposits as a reserve contrary to the potential withdrawals. The Fed varies the amounts of the reserve ratio in order to control the quantity of money that is under circulation in the country. Through this avenue, the Fed manages to control all the rates of discounts set by the banks in the country.
How the monetary policy aim to avoid inflation
Control of the interest rates is the main avenue of controlling deflation by the Fed. The Fed ensures that it has maintained a stable state of governance among the people in the banks. Through control of the rates of discount, the Fed manages to keep the level of goods and services together with money in circulation at a stable state of control. The direction of the interest rates dictates the levels of inflation that a country can engage. For instance, the Federal Reserve ensures that it has maintained a stable standard of inflation levels. For instance, the Fed ensures that the interest rates are not too high since this will result in recession. In this case, the economy of the state will be devastated (Wells, 2004).
How the monetary policy control the money supply
The Federal Reserve makes use of the rates of discount in order to control the amounts of money in circulation. The supply of money is a facet that is controlled by the rates of discounts issued by the Federal Reserve. The total amount of money under supply is a function of the discount rates through which the available facets are applied. It is necessary to consider the levels of performances that are accrued to all the rates of discount. Through maintenance of stable state levels of discounts, the Fed manages to keep a balance of the monetary supplies in the market. Through maintenance of a stable level of interest rates, the Federal Reserve maintains the total amount of money that is under circulation (Wells, 2004).
How a stimulus program affect the money supply
The stimulus program is used as an entity that relates the total amount of money supplied to the market and the rates of growth and development of many economies. The monetary supply program is crucial when it comes to controlling the services and directions taken by banks and other organizations. Such directions are those that dictate many monetary performances in the market. In order to foster an equitable state of mainlining monetary supply in the market, the stimulus programs are used as indicators. They indicate possible cases where the country is likely to engage in inflation and recession. Through control of the interest rates together with supply of money, the stimulus is used as an indicator that reflects on the general performance of many monetary parameters without failure.
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