TheFederal Reserve System
Asthe title FedRaises Key Interest Rate for First Time in Almost a Decadesuggests, Binyamin Appelbaum’s article is talking about the Fed’sresolution to increase interest rates for the first time ever sincethe financial crisis started. Basically, Appelbaum’s article is arecap of a news conference conducted by Janet Yellen, the Fed’schairwoman, shortly after the announcement was made. In the 2015conference, Janet Yellen justified Fed’s decision, citing that itwas made in the “backdrop of considerable progress that had beenmade towards easing economic hardships, raising incomes, andrestoring jobs in America” (Par. 4). In this regard, Yellenemphasizes that they have the intentions of gradually raisinginterest rates but only if economic growth is sustained (Par. 3).
Justifyingthe rise in interest rate, Yellen observes that the Fed’s made themove to “improve its defense against future perils, includingeconomic turndown and higher inflation rates” (Par. 5). Nonetheless, Yellen is quick to comment by saying: “the interestrates on other kinds of loans, like auto loans and mortgages, aremostlikelyto remain low for years to come” (Par. 7). In his article,Appelbaum also takes account of the views of the opponents of theFed’s stunt, mentioning the likelihood of causing a correspondingincrease in the interest rates of other financial services likemortgages and auto loans which is absolute prejudice against theAmerican middle class (Par. 15). Generally, Appelbaum’s article isFed’s justification of its move (through the lens of itschairlady), the plausible outcomes, and reactions to an increase inshort-term interest rate.
Aboveand beyond Appelbaum’s superficial consequences of the Fed’smove, Tara Siegel Bernard elaborately explains how the Fed’sinterest rate increase directly affects consumers. The first effectof an increase in interest rate, according to Bernard, is thatconsumers will be able to have easier access to higher-yieldingcertificates of deposit as well as savings accounts although thereturns will remain to be a trifling amount (Par. 5). She contendsthat even if the banks raise interest rates, they are most likely noto move quickly (Par. 6). Second, Bernard observes that the prices ofbonds tend to fall when there is an increase in interest rates (Par.11). Therefore, the author notes that consumers can benefit by virtueof purchasing new bonds being issued at slightly higher interestrates.
Third,Bernard observes that even if there is no direct link between homeloans and the Fed’s action, still some home loans (adjustablemortgages) are greatly affected (Par. 16). Therefore, for an averageconsumer on an adjustable mortgage, annual readjustments can have acumulative effect on the pricing making it more expensive to servicea home loan in the long run. Regarding consumer loans, Bernardobserves that a high Fed interest rate implies higher rates forsecuring lines of credit from a bank with the exception of studentloans that carry a fixed rate (Par. 24). Hence, it will be morecostly to obtain and finance a financial institution’s loan. Theseare the four major areas Tara Siegel Bernard highlights as the areaswhere a consumer will be affected by the Fed’s stunt.
Accordingto the article by FederalReserveEducation, the Federal Reserve Systemis the central bank of the US (Par. 1). consists of three key entities: the FOMC (Federal Open MarketCommittee), the BOG (Board of Governors), and the FRBs (FederalReserve Banks) (Par. 4). Located in Washington DC, the BOG providesstewardship for the system. It consists of 7 president appointed andsenate confirmed governors. They are tasked with the responsibilitiesof guiding monetary policy actions, analyze financial and economicconditions, and lead committees studying current financial andeconomic issues. The most important function of the BOG isparticipating in FOMC meetings (Par. 9). The FOMC is the Fed’smonetary making policy arm, responsible for designing andimplementing policies intended to stimulate stability in currencyprices and economic development (Par. 17).
Simplyput, the FOMC is the body in charge of managing the state’s supplyof money by performing its dual mandate of promoting economic growthand stable pricing. The Fed is said to have a dual mandate becauseunlike other banks that only promote stable pricing, the FederalReserve Bank of the United States also promotes economic growthwhile considering the rate of employment as well (Par. 32). Othercentral banks only serve to stabilize a country’s currency, but donot regulate and inspire economic growth and employment. The thirdarm of the Federal Reserve System is the FRBs, which is a network of12 Fed Banks under the oversight of the BOG (Par. 37).
TheFederal Reserve System has 12 regional FRBs and not one central banklike in other countries. This is because as the Federal ReserveSystem was set up almost 100 years ago, it was thought that the bankshad to spread out into the then 12 districts to effectivelycoordinate national banks. This arrangement was created in thebackdrop of poor communication networks of that time. The banks wereinitially intended to operate autonomously, but with development incommunication and technology, the effective conduct of monetarypolicy required increased coordination and collaboration throughoutthe system. This is how the Federal Reserve Act of 1933 was enacted,closely followed by the institution of the present-day FOMC in 1935.According to Hilsenrath’s article, a negative interest rate issimilar to the standard rate of interest, only that the moneylenderpays the debtor in this scenario (Par. 4). The central bankestablishes these rates to control the ceiling and floor prices ofthe overnightrate of a loan. Negative interest rates are not beneficial toinvestors because they provide a leakageonan investment because an investor has to pay a regular sum of moneyto keep their money with the bank (Par. 12).
Appelbaum,Binyamin. "Fed Raises Key Interest Rate for First Time in Almosta Decade." TheNew York Times.The New York Times, 2015. Web. 17 Oct. 2016.
Bernard,Tara Siegel. "How to Handle Your Finances as the Fed RaisesInterest Rates." TheNew York Times.The New York Times, 2015. Web. 17 Oct. 2016.
FreeReserveEducation.org."The Structure and Functions of the Federal Reserve System."TheStructure and Functions of the Federal Reserve System.N.p., 2016. Web. 17 Oct. 2016.
Hilsenrath,Jon. "Fed`s Dislike of Negative Interest Rates Points to Limitsof Stimulus Measures." WSJ.Wsj.com, 2016. Web. 17 Oct. 2016.