'MO - May 2008 - (Page 13)

community the Fed has direct control over only one: the “discount rate.” The discount rate is the interest rate the Fed charges its member banks on money borrowed for certain short-term loans. The Fed also has inﬂuence over the federal funds rate. The fed funds rate is the rate for one bank to borrow from another. Banks keep money deposited with the Fed to meet the Fed’s reserve requirement. During a normal business day, a bank may end up with more or less in its reserve account than the required amount. If it has too little, it may borrow from other banks. If reserves are above the minimum, the bank can loan the excess to a bank that is below minimum. The market for federal funds determines the federal funds rate. By controlling the discount rate, the Fed can inﬂuence the nation’s economic cycles, to some extent. Let’s look at some scenarios: If the nation’s economy expands rapidly, historically the threat of inﬂation becomes a worry for consumers. The Fed ﬁghts inﬂation by increasing these key interest rates. By raising the fed funds rate, the Fed decreases the amount of money available to the national banking system. Banks tend to base the rates charged for business and consumer loans on their own cost of funds. So an increase in the discount rate and fed funds rates will usually lead to banks increasing their lending rates. This makes borrowed money more expensive for businesses and consumers. By making borrowed money more expensive, the Fed hopes to slow inﬂation by slowing down the rate at which money is spent. When the economy is dragging and needs an extra monetary boost, the Fed “loosens” the nation’s money supply by decreasing the discount and fed funds rates. By lowering these rates, the Fed makes more money available to the nation’s banks. This leads to borrowed money becoming cheaper for consumers and businesses. The extra money helps stimulate consumer spending and promote economic growth. You may want to pay close attention to the actions of the Federal Reserve, especially if you have interest rate-sensitive loans and investments. As the Fed attempts to balance the slow down in the economy while not letting inﬂation get out of control, interest rates will become a central focus to any investor. nina is an accredited asset manager and member of the gsba. she can be reached at money@ moseattle.com. ‘Mo Money Stimulating Interest: The Federal Reserve and the Economy by nina rose You may have been hearing a lot lately about the Federal Reserve, better known as “the Fed”, and its chairman, Ben Bernanke. You may also already know that the Fed has an inﬂuence on interest rates, which in turn inﬂuences the economy. But there is more to the Fed than meets the eye, and the reasons behind the interest rate changes may interest you as an investor. The Fed was established in 1913 and consists of a seven-member board of governors, including the chairman. All are appointed by the president and approved by the Senate. The nation is divided into 12 Federal Reserve districts represented by 12 Federal Reserve banks. Since its establishment, the Fed has become responsible for directing the nation’s monetary policy. There are many different interest rates, but www.urbanbeast-seattle.com 217 YALE AVENUE NORTH, SEAT TLE, WA 98109 moseattle.com 13 issue #15 | may 2008 http://www.urbanbeast-seattle.com http://www.urbanbeast-seattle.com http://moseattle.com

Table of Contents Feed for the Digital Edition of 'MO - May 2008

'MO - May 2008 Contents Letter From the Editor Voices Instant Activist Pet Project 'mo-BIZ: SeattleMeds Pharmacy 'mo-Money: The Federal Reserve 'mo Magazine Interview with Will & Grace Star Leslie Jordan Form & Function: Better Legs By Summer Healthy Alternatives Vancouver: Heading North in Rail Time Book Review: Where Are You Now? By Mary Higgins Clark Seattle International Film Festival Preview Capitol Hill Guide SceneOut: People@Places 'mo-Single Q&A

'MO - May 2008

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