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Federal Funds Case Summary

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a. The idea behind the Feds selling Treasury securities is to increase the federal funds rate. When doing so, the prices of the securities are going to go up, therefore, creating an upward pressure on the prices of the federal funds rate. These actions are done by the trading desk at the New York Fed, once instructed they will sell the securities to the highest bidder.
b. The prices of Treasury Bills are going to go up, thus an upward pressure is going to be applied to the treasury yields. The action of buying Treasury securities is done in order to increase a money supply throughout the economy. If one has a higher priced security, then their return (if they hold it until maturity) is going to be lower. These Treasury yields will not …show more content…

Financial Institutions could potentially see an abundant weakening in the amount of loans they contribute out. No one is going to want to take out loans whenever they have to pay a superior percent of interest in return. One of the arguments of a restrictive monetary policy is to cutback economic growth – doing so by raising the interest amounts. This could halt deficit units from borrowing money from financial institutes until interest rates go back down or at least from borrowing large amounts of money for upcoming developments. The credit risk is going to unquestionably increase because financial institutions are going to be taking a much larger risk of lending out loans. These deficit units are going to have to find some large amount of security (possibly) to put up, because financial institutions will not just be “handing out” money with the risk going up. Performance of financial institutions are going to drop in the amount of money they are willing to be lending out. Borrowers, who are already considered to be the deficit unit, will not want to get a loan at a high percent of interest. So financial institutions who currently give out credit to deficit units are going to see the numbers in their books go

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Through the open market operation the Fed can try t o promote and/or achieve aggregate demand growth which is the sum of private consumption, investments, government spending and imports by purchasing government securities on the open market. This will definitely yield specific economics results which will include an increase in the reserves of commercial banks, an increase in the price of government securities and an effective decrease in government securities' interest rates and the overall interest rates. The move can effectively promote business investments. Whenever banks increases the reserves, they increase their loans and investments. The sell of those government securities will definitely do the opposite.

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With its power to stabilize the financial industry and consolidate monetary policy under a single body, the Federal Reserve is a vital component of the US economy. The independence of the Federal Reserve, which spares it from the influence of political demands, is one of the institution's advantages. This independence aids in keeping the Fed from adopting measures that could be advantageous for reelection in the short run but would cause long-term economic harm down the road. In addition, the Federal Reserve's function as a lender of last resort to commercial banks guarantees that banks will always have access to money when they need it and contributes to the stability of the banking system. The Fed has been successful in lending money to banks

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This increase translates in a reduction of borrowing power as borrowers will have to pay more in interest. At the moment, the increase does not affect the economy as much because it was a very small increase. However, if this trend continues, it might actually have a big impact on the economy as the interest rate will accumulate to bigger percentages. The increase in interest rate will affect car payments, students loans, and many other loans. Although most borrowers are being affected by this increase, it is important to mention that not all payments will be immediately affected as not every loan has a fluctuating interest rate.

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The Fed’s goal in trading the securities is to affect the federal funds

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“Then the United States Treasury makes the country’s cash supply and sells the paper currency to the banks of the Federal Reserve at a production cost and the coins at face value” (Wikipedia Foundation). The Federal Reserve

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This uncertainty causes bankers and investor to stay away from U. S. backed securities, which then causes the government to loose

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