The Federal Reserve and the Economy
By Saghir Aslam
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
You may have been hearing a lot lately about the Federal Reserve, better known the “Fed”.
You may also already know that the Fed has an influence on internst rates, which in turn influences the economy. But there is more to the Fed than meets the eye, and the reasons behind the interest rate changes may interest you as an investor.
The Fed was established in 1913 and consists of a seven-member board of governors, including the chairman. All are appointed by the president and approved by the senate. The nation is divided in to 12 Federal Reserve districts represented by 12 Federal Reserve banks. Since its establishment, the Fed has become responsible for directing the nation’s monetary policy. The Fed also regulates the nation’s banks and other depository institutions and supervises directly many commercial banks. The Fed also tries to support other financial markets by maintaining stable conditions for financial transactions.
Although the Fed has many responsibilities, most investors only think of the Fed as having control over the interest rates that affect the U.S. financial markets. There are many different interest rates, but the Fed has direct control over only one of those interest rates, the “discount rate.” The discount rate is the interest rate the Fed charges its member banks on money borrowed for certain short term loans.
The Fed also has influence over the federal funds rate. The Fed funds rate is the rate for one bank to borrow from another. Banks keep money deposited with the Fed to meet the Fed’s reserve requirement. During a normal business day, a bank may end up with more or less in its reserve account than the required amount. If it has too little, it may borrow from other banks. If reserves are above the minimum, the bank can loan the excess to a bank that is below minimum. The market for federal funds determines the federal funds rate.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr. Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, or does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr. Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr. Aslam does not have anything for sale.)