Money Interest Rates Important Individuals Businesses Making

Money Interest Rates important individuals businesses making decisions finance purchases. The articles deal assessing conditions finance purchases important aspects policy. Allen, Bruce.

Interest Rates

The high unemployment and inflation rates are some of the most important factors that threaten to affect the stability of the U.S. economy. As a consequence, the Federal Reserve is forced to orient its strategy towards reducing the money supply. There are several methods and tools that the Federal Reserve can use in order to reduce the money supply. For example, the Fed can sell government bonds. These securities are directed towards the public, like banks, financial institutions, and individual investors. In this case, this strategy is associated with increasing interest rates.

Another strategy used by the fed in reducing the money supply is represented by modifying the discount rates of banks borrowing from the Fed. This strategy also affects the federal funds rate that is established in accordance with the discount rate. In addition to this, the Fed can reduce the money supply by modifying the reserve ratio, which refers to the value of deposits that banks must have in their reserves. This influences the level of interest rates.

However, the Fed is not expected to increase its interest rates. Although the Federal Reserve has not expressed an official position regarding the modification of interest rates, specialists in the field consider that interest rates are likely to be maintained at their current level. This does not mean this situation cannot have significant impact on the population. This is because lower interest rates can determine price bubbles, and excessive leverage and speculation from most banks (Chan, 2010). But this situation is not approved by the governors of the Federal Reserve. This could mean that the Fed is considering maintaining these lower interest rates. The reason behind this situation relies on the Fed's opinion that these interest rates can have significant impact on the country's economy.

2. The Federal Reserve plays an important role in influencing the country's economic situation. Economic growth is in strong relationship with the level of inflation. Given the fact that inflation is considered a monetary phenomenon, its management is attributed to the Federal Reserve. In addition to this, central banks also have the power to influence inflation rate. The different mechanisms used by central banks in controlling the money supply and inflation are important tools that can have important effects on national economies.

In order to increase economic growth, the Federal Reserve should intensify its focus on controlling inflation. This can be achieved by developing and implementing a strategy intended to monitor the processes and factors that determine the level of inflation. In order to reach this objective, the Federal Reserve is interested in reducing inflation by establishing low interest rates. Although this strategy is criticized by some specialists in the field because it is considered to lead to price bubbles and to increase the power of banks, the Fed's governors have dismissed these opinions.

Therefore, the Federal Reserve focuses on targeting inflation. The level of inflation is considered to be in strong relationship with economic growth, determining central banks to develop strategies based on inflation targeting. This strategy seems to also be preferred by the European Central Bank. Inflation targeting has become an important objective for the Federal Reserve, as a result of economic and financial factors that must be controlled in order to stimulate economic growth.

However, the country's economy depends on a series of factors that the Federal Reserve cannot control. External factors, like the economy of the European Union, the strategy of international financial institutions have great influence on the U.S. economy and on the authorities' strategy. It is important that the Federal Reserve takes these factors into consideration when establishing its strategy.

3. The financial investments made by individuals when purchasing expensive items, like cars, business equipment, or houses usually require loans from banks. Borrowing money from banks is an activity that is affected by a series of risks and that is performed in accordance with certain economic indicators. The most important indicators that are analyzed in such cases are represented by commodity prices. This is because the price of raw materials used in producing the products that must be purchased, the price of different products that must be used in the storage and transportation of the products the buyers are interested in have great influence on the prices of these products (Allen, 2008).