of the Fed
no institution has more power to affect the nation's economy than the Federal
Reserve, the independent central bank established by Congress in 1913. Under the
leadership of its chairman, Ben S. Bernanke, the Fed steers the
economy most directly by periodically raising and lowering the federal funds
rate, which banks charge to each other on overnight loans. Such rate changes can
take six to nine months to work completely through the economy.
Fed policy changes frequently are attributed to the central bank's Chairman,
Ben S. Bernanke, decisions actually are made by the Federal Open Market
Committee. The Federal Open Market Committee consists of twelve members: the
seven members of the Board of Governors of the Federal Reserve System; the
president of the Federal Reserve Bank of New York; and, for the remaining four
memberships, which carry a one-year term, a rotating selection of the presidents
of the eleven other Reserve Banks. The FOMC holds eight regularly scheduled
meetings per year to direct the conduct of open market operations by the Federal
Reserve Bank of New York in a manner designed to foster the long-run objectives
of price stability and sustainable economic growth. The FOMC also establishes
policy relating to System operations in the foreign exchange markets.
2009 Members of the FOMC
Ben S. Bernanke, Board of Governors, Chairman
William C. Dudley, New York, Vice Chairman
Elizabeth A. Duke, Board of Governors
Charles L. Evans, Chicago
Donald L. Kohn, Board of Governors
Jeffrey M. Lacker, Richmond
Dennis P. Lockhart, Atlanta
Daniel K. Tarullo, Board of Governors
Kevin M. Warsh, Board of Governors
Janet L. Yellen, San Francisco
its interest rate adjustments the Fed attempts to guide the economy.
But, what is the actual effect of these actions?
rates go up -
interest rates is considered an effective way to quell inflation. The Fed
raised rates six times over the 11 months ending in May 2000 to keep the
economy from overheating.
Businesses: Higher interest
rates make it more difficult for businesses to get loans to expand.
Unemployment tends to rise, which eases wage inflation, although at a human
Consumers: Higher interest rates
on credit cards and mortgages can cool consumer spending, which accounts for
about two-thirds of economic activity.
Markets: Higher interest rates
tend to attract investment into bonds and other fixed-income investments,
pushing down stock prices.
rates go down -
Fed generally cuts interest rates when inflation is subdued and the economy
needs a boost. The Fed cut rates in January for the first time in two years
in response to a sharp economic slowdown.
Businesses: Lower rates cut the
cost of capital, improving profit margins and encouraging expansion.
Consumers: Lower interest rates
can create economic activity by inducing consumer spending. For example,
lower mortgage rates can spark home sales and mortgage refinancings. But the
Fed's ability to affect such long-term rates is indirect.
Markets: Lower interest rates
tend to boost stock prices because bonds and other fixed-income investments
are no longer so attractive. In addition, lower rates cut costs for
companies, boosting profits.
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