Federal Reserve Harvard Case Solution & Analysis

Introduction

The responsibility of Federal Reserve is to carefully watch the economy of the United States of America. It decides the monetary policy that may assist the economy at a healthy rate. Monetary policy refers to the actions taken by the Central bank, like the Federal Reserve, to influence a country’s money supply or the interest rates. Federal Open Market Committee (the FOMC) is a division responsible of the Federal System to develop monetary policy.

Answer 1

            There are seven members of the Board of Governors which are appointed by the President and confirmed by the Senate to serve 14-year terms of office. Members may serve only one full term, but a member who has been appointed to complete an unexpired term may be reappointed to a full term. The President designates, and the Senate confirms, two members of the Board to be Chairman and Vice Chairman, for four-year terms (Federal Reserve).        

             In making appointments, the President is directed by law to select a "fair representation of the financial, agricultural, industrial, and commercial interests and geographical divisions of the country."  These aspects of selection are intended to ensure representation of regional interests and the interests of various sectors of the public (Federal Reserve).

            The primary responsibility of the Board of Governors is to develop a monetary policy. It has set the reserve requirements and make decisions the discount rate policy with Reserve bank. These policies comprise of the monetary policy tools of the Federal Reserve System. The Federal Reserve Board supervises and regulates banks that are members of the System in the United States, Edge Act and agreement corporations, foreign activities of member banks, and the U.S. activities of foreign-owned banks. The Board also sets margin requirements, which limit the use of credit for purchasing or carrying securities (Federal Reserve)

The Federal Open Market Committee (FOMC) consists of twelve members--the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis(Federal Reserve).

 The rotating seats are filled from the following four groups of Banks, one Bank president from each group: Boston, Philadelphia, and Richmond; Cleveland and Chicago; Atlanta, St. Louis, and Dallas; and Minneapolis, Kansas City, and San Francisco. Nonvoting Reserve Bank presidents attend the meetings of the Committee, participate in the discussions, and contribute to the Committee's assessment of the economy and policy options (Federal Reserve).

The objective of the FOMC is to create an economic environment that stimulates economic growth, full employment and keep prices stable. To this end, a low rate of inflation is maintained. Although prices will rise, however, a high rate of inflation has a negative impact on the economy. Therefore, the Fed strives to keep both the economy growing and the inflation rate low(Federal Reserve).

Answer 2

The Credit growth is responsible for economic growth in the United States of America. When credit expands, consumers’ ability to borrow increases, these borrowings result into expenditure on goods and services, which they can spend on businesses. Increasing consumption and investment creates jobs and expands income and profits. Furthermore, the expansion of credit tends to cause the price of assets such as stocks and property to increase, thereby boosting the net worth of the public (Duncan, 2011).Federal Reserve Case Solution

As the prices of assets rises, the wealth of the owner increases. It also increases their ability to borrow as they have collateral to present to lenders. This cycle of expanding credit leads to increased spending, investment, job creation and wealth, followed by still more borrowing produces a spiral which makes the economy strong. Eventually, however, every credit-induced economic boom comes to an end when one or more important sector of the economy becomes incapable of repaying the interest on its debt (Duncan, 2011).

Answer 3

The Federal Reserve acts as a saver in the bonds’ market and affects the market rates. Bonds are loan contracts. Each bond contract has unique characteristics that define the way repayment will take place. Every bond contract is comprised of the borrower, price, date of maturity, value of maturity and coupon rate (Marotta, 2014).

The price of the bond is the loan itself. The date of maturity is when the face value of the bond is due. The value of maturity is the face value of what the borrower will pay back. The borrower is given a rating of its likelihood to be paid back. The coupon rate is the advertised interest rate. However, the effective interest rate (also called a bond’s yield to maturity) is determined by the coupon rate of the bond as well as the difference between the price and the face value (Marotta, 2014)....................

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