Interest is the cost of borrowing money. You pay it in almost every facet of life and business, from taking out a home mortgage, to credit card use, to equipment loans and lines of credit. The rate that you pay or the percentage is not random and is directly correlated to the Federal Reserve Bank’s (The Fed) interest rate. The Fed’s interest rate has an endless effect on how the economy operates and how business is done throughout the world. This effect not only has a direct impact on the stock and bond markets but has an even greater effect on how business operations make decisions and progress in our society. Monetary policy in the United States has been and always will be one …show more content…
This is a hot topic today in regards to how much that reserve is and what type of risk these banks are allowed to take (Congress has and continues to pass legislation concerning regulation in the banking industry). There is also another option for banks to meet their reserve requirements which is an inter-bank loan. These are loans between banks where by the bank that needs to add to their reserve, borrows from another bank that has a surplus in their reserve. The rate is negotiated between the banks but is not set by the Fed.
The Fed has a dual mandate: to promote maximum employment and keep prices stable. (Lahart) The Fed is a part Government, part private institution. Although the government does not tell the Fed what rate to set for its Discount Rate (the rate at which it lends money to other banks), the President does appoint the chairman of the bank as well as the other board members who are then confirmed by the Senate.
“As stipulated by the Banking Act of 1935, the President appoints the seven members of the Board of Governors; they must then be confirmed by the Senate and serve for 14 years only. Once appointed, Governors may not be removed from office for their policy opinions” (Wikipedia)
This policy is viewed to work outside the lines of politics and political opinion. Therefore it is not incumbent on the Fed to create policy based upon the current Presidents economic policy and opinions although as an