Federal Reserve System Coursework Example

Name: Professor: Course: Date: The Role of the Fed in Interest Rates The Federal Reserve System, commonly referred as the Fed is responsible for regulation of all commercial banks. To perform its roles, it integrates its functions alongside the monetary and fiscal policies to ensure its efficiency and offer a conducive economic environment for all businesses. Although the market has a great role to play in influencing interest rates, the Fed can also influence the interest rates at a given time. One of its major policies on long-term interest rates is aimed at decreasing long-term interest rates rather than the short-term interest. This move, although questionable by many is aimed at encouraging firms to borrow and spend more funds (Mandura, 109). If interest rates are reduced in the long term, more investment opportunities emerge; anyone will be willing to take up a mortgage provided the interest rates are lower in the long-term as opposed to an uncertain future, or low short-term interest rates. While firms are more willing to spend on new projects; this will positively impact the economy as more employment opportunities are created not to mention the great boost it will have on the economy. Hence, the Fed’s strategy on reducing long-term interest rates contrary to short-term interest rates could prove to be a far more important tool for a weak economy than anyone could speculate. The Fed can lower long-term interest rates in favor of business spending by use of a monetary policy that is geared towards reducing the yield on Treasury securities (Mandura, 109); which play a great role in influencing interest rates. When the need arises to lower the long-term interest rates, the Fed, could assess the amount of treasury stock in its investments, then decide to sell a given percentage of their the short-term Treasury securities. Such an amount that has a significant impact on the future interest rates. From the proceeds, it then goes ahead to purchase the lon...