Established in 1913 as per the Federal Reserve Act, The Federal Reserve System (Fed) was first designed to stabilize and regulate monetary and fiscal systems. As the national bank of the United States, the Fed is an independent component of the government. Although it regularly communicates and is advised by many parts of the economic system, the Fed operates and makes world-affecting decisions without the consent, oversight, or regulation by any other part of the government. However, the Fed does receive its appropriated power from Congress and statutes passed in the house can alter its duties. The Federal Reserve System is made up of four interconnected divisions that have there own responsibilities separate from the other parts: Board of Governors,
Federal Open Market Committee, Federal Reserve Banks, and the Reserve Bank Board of Directors.
One of the jobs of the Fed is the Beige Book. The beige book is defined as a report on recent economic conditions, published eight times each year. The Beige Book is part of the Federal Open Market Committee’s preparations for its meetings and is released two Wednesdays before each meeting. The book is a summary of economic conditions in each of the Fed’s regions. The most current
April 2004 summary can be viewed by accessing the Feds homepage or going to: http://www.federalreserve.gov/fomc/beigebook/2004/20040421/default.htm. It contains information on consumer spending, tourism, manufacturing, real estate and construction, agriculture, natural resource industries, labor markets, wages and prices and banking and finance in each district. The report is primarily seen as an indicator of how the Fed might act at its upcoming meeting regarding interest rates.
Consumer spending has been the key to the United States economy since the beginning. As consumer spending increases or decreases, the interest rates fluctuate. The Consumer Expenditure Survey measures the spending habits of American consumers and includes data on their expenditures, income, and characteristics. By recording consumer activity in the districts, the Federal Reserve board is able to calculate the appropriate percentage. By controlling the money supply they are able to influence our economy in each direction. They are the system that decides how much money is in the economy, which can either cause our economy to expand or contract. If they want to increase the money supply they buy securities and to decrease the money supply they sell securities. When inflation is high, everything costs more, so money is worth less. Having too much currency in the market is usually to blame for this. This has a huge impact on business long term planning and growth. Both businesses and individuals are less likely to spend on things like building, houses or saving because of the fear of their investment becoming worthless. The U.S. economy is struggling with the collapse of a gigantic stock mania. Sinking prices for telecom services, to name just one conspicuous example, are already making it harder for some businesses to support their heavy debts. High inflation leads to higher prices. Higher prices cause less purchasing power, which means demand is down. This leads to a surplus of goods in the economy, which causes high unemployment because production has to decrease to compensate for the demand. With less production there are fewer jobs available, which make unemployment rates soar. Some unforeseen misshape in our business sector over the last few years has caused our economy to go soft. To combat this the Fed has used another one of its tools to control the economy. It has been lowering both the Discount Rate and Federal Fund Rate at an unprecedented amount. The Discount Rate is the amount the banks are charged to borrow money from the Reserve and the Federal Fund Rate is the required reserve that a bank must hold for deposits. By lowering both the Discount and Federal Fund Rates, the Fed has made it very inexpensive to borrow money and quite unattractive for savings. This has kept a very uneasy market at a very fine balance by basically flooding the market with lots of cash. By making it so cheap to borrow money, and unattractive to save, this has fueled the consumer spending marathon. This causes an increase in demand which helps keep the unemployment rate down.
Alan Greenspan and his colleagues at the Federal Reserve have spent their professional lives fighting inflation and trying to maintain the economy. But in the fall of 1999, central bank officials gathered in Woodstock, Vt., to talk about the opposite: What would they do if faced with deflation, or widespread falling prices, and they already had cut interest rates to zero? At Woodstock, researchers brainstormed about possible ways the Fed could spur spending, such as adding a magnetic strip to dollar bills that would cause their value to drop the longer they stayed in one’s wallet. At the time the chance of deflation in the U.S seemed remote. Inflation was low, but the economy was booming and the Fed had lifted short-term interest rates above 5%. Today, deflation no longer seems so remote. Fed officials and most private economists still think deflation is highly unlikely. While the Fed is expected to cut rates, that’s more out of concern about slow growth, not deflation. Most Fed officials feel that the points of rate-cutting room they have left are plenty to get the economy growing briskly again.
As to the most recent report, On Tuesday, April 20, 2004, “Mr. Greenspan’s speech to the Senate Banking Committee sent chills down Wall Street’s spine as investors woke up to the fact that interest rates might rise from 46-year lows sooner than expected. It took the second part of Mr. Greenspan’s congressional testimony on Wednesday for investors to conclude that the Fed chief was saying nothing he had not said before. Having sent stocks lower on fears of what rising borrowing costs might do to earnings growth, investors regained their composure.” according to yahoo news. The realization that an interest rate rise was inevitable and might not be as ugly as it first seemed, silenced Wall Street’s fear and turned it into greed. The Fed would rather have the economy have a steady, slow growth. When things move to quickly they become very hard to control and manage. When things are slow and predictable our entire economy is far better off in the long run for everyone.
Resources:
http://www.lowellsun.com/Stories/0,1413,105~4744~2107046,00.html
http://news.yahoo.com/news?tmpl=story&u=/ft/20040423/bs_ft/1079420567075
http://www.econ.pncbank.com/neoaug.pdf
http://news.yahoo.com/news?tmpl=story&u=/afp/20040423/wl_asia_afp/forex_asia_040423054150
http://www.sentinelandenterprise.com/Stories/0,1413,106~4989~2103675,00.html
http://www.federalreserve.gov/fomc/beigebook/2004/20040421/default.htm
Ebert, J. Ronald – Business Essentials – Custom Edition