In article 4 (page 14) of the book I discuss the role of the Federal Open Market Committee which is the body that sets the level of US short-term interest rates. In the key terms section I define the role of the Federal Open Market Committee (FOMC) as follows:
"The FOMC decides on changes in US monetary policy. It is made up of twelve individuals. The core seven come from the Central Federal Reserve Bank (based in Washington) and the other five represent the various Federal District Reserve Banks. One of these, New York, has a permanent place on the FOMC. The other eleven banks share the remainder of the votes on a complex rotation system. The FOMC reviews the outlook for the economy before deciding on the next move in interest rates".
Well last week (December 15/16) the FOMC lowered the target rate for the Fed Funds Rate to just 0-0.25%. I should explain that in reality there are two slightly different Fed Funds Rates:
1) The official Fed Funds Rate - this is the one that the FOMC sets a target for.
2) The market Fed Funds Rate - this is the one that is set according to the pressures in the interbank market each day.
You will find that the variations between these rates are normally very small. So with a target of 0-0.25% the Fed will ensure that the daily market rate remains within these bands.
It is clear from this latest move that the Fed has now done everything that it can to revitalise the US Economy. This is the lowest level in the nation's 232-year history. This means that the FOMC has now taken Us short-term interest rates down from 5.25% to close to zero in just over a year. They must now stand back and hope that this dramatic intervention will restore some activity to the US economy.
Dec 22, 2008
Fed cuts interest rates again!
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Dear Kevin
Just to a little bit to your article.. BoJ has also cut the key rate(the Overnight call rate) to 0.1% by 20 basis points. This was just three days after the Federal Reserve's cut. It is explained in the financial times that the action was caused by weak economy and yen's rise. In fact Yen reached 13-year high against dollar as the Federal Reserve cut interest rates.
Bank of Japan could still cut the rates to zero however BoJ is reluctant to do so as it will create difficulties maintaing the function of short-term money markets.
In my opinion, If the Japanese economy doesn't improve in next year than BoJ has no choice but to bring down the rates to zero. And perhaps it could bring an end to yen's rapid surge and help large Japanese companies. Earlier this week Toyota – the Country’s biggest car maker reported first operating loss and it announced that some of it was due to the appreciating Japanese yen…
FOMC has taken sharp action to cut the interest rate from 5.25 to 0% in just over one year, when they economy was stepping into the sub-prime mortgage problem, slow down in the economy and increasing unemployment figures. Observers said ,that those cuts will help to recover the US economy quicker than in UK, where Bank of England was holding back the monthly policy reduction till last minute. Hope, it was not too late. The state of the economy is negative, with expectation by economists to recover in 2010.
Fed cut the interest rate in December to 0%, in order to restore the consumer spending. It will not be easy to do so, as there is more bad date flooding the economy.
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