If at its next policy meeting the FOMC decreases its target federal funds rate,
ID: 1211996 • Letter: I
Question
If at its next policy meeting the FOMC decreases its target federal funds rate, describe the open market operations the Fed would enact to achieve a lower federal funds rate. Explain briefly, and show graphically the effects of these open market operations on the federal funds rate. Briefly explain what the Fed would be trying to achieve with a lower target rate and how the actions that bring about the lower federal funds rate will help to achieve this objective. Explain the effect this policy action is likely to have on the exchange rate of the U.S. Dollar.Explanation / Answer
In the United States, the federal funds rate is the interest rate at which depository institutions which includes banks and credit unions lend reserve balances to other depository institutions overnight, on an uncollateralized basis.
a) If securities are purchased from market, it will lead to increase in funds in hands of these institutions. It will lead to increase in supply of money and thereby decrease in federal interest rate and vice verca.
b) Changes in the federal funds rate will always affect the U.S. dollar. When the Federal Reserve increases the federal funds rate, it normally reduces inflationary pressure and works to appreciate the dollar.
c) When the Fed increases interest rates, it attracts foreign funds to the U.S. This leads to a natural appreciation of the U.S. dollar.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.