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Federal Reserve Case Study

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(A) Macroeconomic Variable- Monetary Policy of Federal Reserve
The scenario above talks about the changes in the Fed Rate. Fed rate is the rate at which the Federal Reserve lends to the institutions in America. Through this rate Federal Reserve tries to control the inflation in the economy. By increasing the rate, it attempts to reduce the supply of money from the hands of the people so that prices can come down. By decreasing the rate, it attempts to increase the money in hands of the people so as to encourage spending.
Implication- This rate is significant because commercial banks and other financial institutions like JP Morgan decide upon their prime lending rate based on the Fed rate. Prime lending rate is in turn used for mortgage rates, credit card rates, and consumer and …show more content…

Fed rate hike will increase its cost of borrowing. Thus the cost of its services will increase. Hence in order to retain clients it will needs to have different schemes for different clients and need to have clients with good credit ratings as the cost of borrowing is going up here.
• Market Risk- since the interest rate is increasing here, the prime lending rate of JPMC will have to increase. This will lead to increase in the revenue for the company but at the same time, it may discourage borrowing leading to lesser new clients.
• Credit Risk- This refers to the counterpart risk and it increases with the rate hike as the cost of borrowing is going up. This means that expenses of the borrowers are also going up. When their expenses are increasing then the chances of default will also increase.
• Liquidity Risk- Fed rate hike as explained above is contractionary monetary policy. By increasing the funds rate fed will increase the cost of borrowing. This will discourage banks to borrow from the central bank causing the reduction in the

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