Federal Reserve System Coursework Example

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Date: The Role of the Fed in Interest Rates
The Federal Reserve System, commonly referred as the Fed is responsible for regulation of all commercial banks. To perform its roles, it integrates its functions alongside the monetary and fiscal policies to ensure its efficiency and offer a conducive economic environment for all businesses. Although the market has a great role to play in influencing interest rates, the Fed can also influence the interest rates at a given time. One of its major policies on long-term interest rates is aimed at decreasing long-term interest rates rather than the short-term interest. This move, although questionable by many is aimed at encouraging firms to borrow and spend more funds (Mandura, 109). If interest rates are reduced in the long term, more investment opportunities emerge; anyone will be willing to take up a mortgage provided the interest rates are lower in the long-term as opposed to an uncertain future, or low short-term interest rates. While firms are more willing to spend on new projects; this will positively impact the economy as more employment opportunities are created not to mention the great boost it will have on the economy. Hence, the Fed’s strategy on reducing long-term interest rates contrary to short-term interest rates could prove to be a far more important tool for a weak economy than anyone could speculate.
The Fed can lower long-term interest rates in favor of business spending by use of a monetary policy that is geared towards reducing the yield on Treasury securities (Mandura, 109); which play a great role in influencing interest rates.

When the need arises to lower the long-term interest rates, the Fed, could assess the amount of treasury stock in its investments, then decide to sell a given percentage of their the short-term Treasury securities. Such an amount that has a significant impact on the future interest rates. From the proceeds, it then goes ahead to purchase the long-term treasury securities. The immediate impact of this will be; an increase in the short-term interest rates, which would not be so attractive to short-term investors, and a decline in the long-term interest rates. Quite a favorable opportunity for firms to spend much of their funds (Mandura, 109).
The stimulative monetary policy applied by the Fed to lower long-term interest rates could also influence the lowering of the short-term interest rates as well if not properly implemented. This could be influenced by factors beyond the control of the Fed such as the credit limits offered by banks (Mandura, 110). This will not allow banks to lend more than their limit. Hence firms may not have enough to spend, or even the credit qualifications of the firms that could limit their borrowing hence the operation twist does not take effect. The move might also trigger inflation (Mandura, 111). When this happens, the Fed might not make another move to try and correct the situation but wait for the market to adjust itself, hence minimizing the intended outcome. Additionally, the banks are also appreciated for enabling people to save. In the event of the implementation of the stimulative strategy, the levels of savings will decline due to a reduction in returns on savings (Mandura, 110). Hence encouraging people to borrow as a result of the lower rates. However fear of bankruptcies arises as one might borrow heavily and is unable to pay the loan, which will adversely impact the economy.
In as far as the Fed is aimed at regulating the commercial banks and other financial institutions, policies should always be weighed heavily to minimize the adverse impact they might cause to the economy. More so when implementing a strategy that could cut the economy in both ways, the positively impacting policies should always prevail.
Work Cited
Madura, Jeff. Financial markets and institutions. Nelson Education, 2014.