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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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If the Fed goes ahead and maintains an interest rate target while money demand changes, it will have to adjust its money supply and hence, miss its money supply target. On the other hand, if the Fed maintains a money supply target while money demand changes, it will have to let interest rate change and hence, miss the interest rate target. Money supply influences the interest rate i.e. if there is less money in circulation, interest rates will be higher and vice-versa. Theoretically, the Fed can only control both the interest rate and money supply if there are strict limits on capital investments (lending and investments) which would be almost impossible to

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It is the rate at which depository institutions borrow and lend from one another in the federal funds market. The FOMC’s open market operations lower the rate by increasing the reserves supplied to the economy, or alternatively, raise the rate by reducing the supply of balances. Due to a term structure of interest rates, the changes in the short-term interest rates are transmitted to the long-term interest rates since the financial markets expect the changes to persist for an extended period of time or assume that they convey information about the future monetary policy. Also, the inflation inertia ensures that the change in the federal funds rate effectively influences the real interest rate which is equivalent of the cost of borrowing. By altering the cost, federal funds rate indirectly affects the spending and investment by households and businesses, which on their turn, impact output and inflation in the economy.

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On the other hand, at lower interest rate there is a higher incentive to borrow. The money borrowed by the various people can take to the investment sector. This means that the number of firms would greatly increase due to the high number of people investing in various sectors. From this, we can clearly see that interest rates have an inverse relationship with the number of firms. Another effect of the increase in interest rates is in the effect on the employment numbers.

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