United States Federal Reserve System Factors that influence the Federal Reserve in adjusting the discount rate

Interest rates are charged for loans to commercial banks. In accordance to the rules and regulations of the Federal Reserve, this is a principle that can be used as a means of controlling the money supply. An increase in the level of the money supply is achieved when the Federal lowers the rates of discount. A decrease for money supplied is achieved by raising the amounts of loans issued by the Federal Reserve. The board of governors is subject to scrutiny and approval of the levels of discount rates that are set by the Federal Reserve. The Federal Reserve does not work on its own. It operates under strict guidance from the board of directors within the organization. The decisions made by the board of governors through the Federal Reserve are directed at maintaining the rates of discount and not the amounts of money supplied to the markets. Nonetheless, the Fed makes use of the discount rates in order to monitor the nature of the money supply to the market (Brown, 2008).

How the discount rate affect the decisions of banks in setting their interest rates

The rates of discounts are effectual to the decisions made by the banks. The aims of the banks are directed at making a profit from any way possible. The methods used by the Fed are rudimentary to the amounts of profit made by the banks. For instance, when the Fed increases...

On the other hand, when the Fed decreases the discount rates, the banks have to adjust to lower rates of discounting with an aim of making reasonable profits from the public and corporate. The control of the rates of interests is the main activity that is monitored by the Federal Reserve. In order to attain an equitable supply of money, the system has to make several considerations that are directed at influencing the rates of interests applied by the banks (Wells, 2004).
From the reserve ratios, banks are expected to keep a given proportion of their deposits as a reserve contrary to the potential withdrawals. The Fed varies the amounts of the reserve ratio in order to control the quantity of money that is under circulation in the country. Through this avenue, the Fed manages to control all the rates of discounts set by the banks in the country.

How the monetary policy aim to avoid inflation

Control of the interest rates is the main avenue of controlling deflation by the Fed. The Fed ensures that it has maintained a stable state of governance among the people in the banks. Through control of the rates of discount, the Fed manages to keep the level of goods and services together with money in circulation at a stable state of control. The direction of the interest rates dictates the levels of…