Federal Reserve Policies
One of the functions that the United States Congress charged the Federal Reserve System with in 1913 was guiding monetary policy. Now, it is certainly the Fed’s most famous responsibility. Yet few people really understand how it is that the Fed guides the nation’s economy. The inflation targeting policy used by many central banks around the world maintains low inflation, increases financial market stability, and reduces risk, all factors that tend to lower interest rates.
The Effect of Federal Reserve Policies on Forex
By Namita V
The recent meltdown has focused attention on the US Federal Reserve. The Federal Reserve has had a key role in reviving the economy and getting it back on track during the recession. Its policies have affected the United States and the globe, primarily because of the high degree of integration among major global economies.
Photo: federal-reserve.org
The Federal Reserve was established in 1913 and its role was to foster the development of a stable and responsive economy for the country. Over the years, the Federal Reserve has also taken up responsibilities like framing the country’s fiscal policies and aiding banks. The Reserve’s cardinal function is to regulate the flow of money in the economy. The Federal Reserve is responsible for ensuring that the economy has adequate liquidity. This in turn also influences other macroeconomic factors like employment, economic growth rates and market demand and supply.
A growing economy represents the best opportunities for both the industry and the markets. The Federal Reserve has the responsibility to maintain employment rates in times of recession and ensure that the economy is stable. The Federal Reserve has to monitor the economy and control areas like inflation and interest rates for banks. This represents an indirect control over the forex market through financial institutions. The global interbank forex markets are thus affected by the Federal policies. The Federal Bank stepped in to correct the situation when the banking system collapsed recently. The Reserve flushed in billions of dollars in to beaten down banks in order to rescue those on the verge of bankruptcy or collapse. This also ensured that there was enough credit available in the domestic and forex markets to continue trading.
Stable interest rates are a prime concern for an economy like the United States. Being a credit oriented society, an increase in interest rates can even freeze the economy, if appropriate steps are not taken. Unpredictability also results from fluctuations in lending rates. The Federal Reserve controls the rates at which banks can lend money and this has an impact on the forex markets. The higher the rates, the lesser the demand for credit. This causes a weakening of the currency in the global forex markets. The Federal Reserve steps in to monitor and control the fluctuations and ensure that the consumer’s interests are protected.
The Federal Reserve also has to ensure that the United States has a stable currency. The dollar’s stability ensures that the economy continues to function well. The policies issued by the Reserve have ensured that the dollar remained strong even when the banking sector collapsed and the country went into recession. This in turn has helped strengthen recovery from negative economic indicators. The forex has thus seen other currencies weakening but a relatively stable dollar. These fiscal policies in combination with other measures has helped ensure recovery of the economy. The 700 billion dollar bailout was an unpopular but immensely helpful measure taken by the Federal Reserve. The move had not found favor among Congresspersons but it was still passed due to the dogged determination of the Federal Reserve. The bailout has a favorable impact on the financial sector. Forex markets witnessed a strong dollar against most currencies and increased investor confidence in the Dollar.
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