The primary purpose of the Federal Reserve, as the central bank of the United States, is to ensure a stable financial system. As Kavan Choksi Hong Kong says, the goals of the Fed include ensuring stable prices and promoting maximum employment. It is also responsible for supervising and regulating banks to ensure the safety of the banking system. The Fed provides financial services to the U.S. government, U.S. financial institutions and foreign official institutions, and maintains the stability of the financial system. It also plays a key role in overseeing the payment systems of the nation.
Kavan Choksi Hong Kong talks about the Federal Reserve and the impact of their decisions
The decisions made by the Fed have a significant impact on the economy. They can impact the amount of money in circulation and the cost of borrowing to a good extent by adjusting their monetary policy tools. By lowering interest rates, for instance, the Fed would be able to encourage borrowing and investment, and stimulate economic activity. On the other hand, they may opt to raise the interest rates to curb inflation and cool down an overheating economy. A good example of this dynamic in action was during the financial crisis of 2007 to 2008. Back then, the Fed lowered interest rates to near zero. This was done in order to encourage investment and spending. A similar thing was done again in response to the economic impacts of the COVID-19 pandemic.
The decisions of the Fed impact the economy by influencing investment, consumer spending and lending rates. Lower interest rates make borrowing more budget-friendly, and encourages consumers to spend on major assets like cars and homes, and motivate businesses to invest in expansion. This ultimately can lead to improved economic growth and job creation. In case the money supply grows too fast, however, it may lead to inflation.
As Kavan Choksi Hong Kong says, the decisions and actions of the Fed can also have a direct impact on the stock market. Owing to the cheaper cost of borrowing, lower interest rates generally lead to higher stock prices. It also facilitates the relative attractiveness of equities over fixed-income investments. During an economic crisis or recession, the Fed may implement quantitative easing. This would involve buying securities to inject liquidity into the financial system, in order to stabilize the markets and encourage lending and investment.
On an individual level, the decisions of the Fed can impact personal finances through the availability and cost of credit. This would include loans, mortgages and other forms of borrowing. Lower interest rates would invariably imply to cheaper costs for consumers, hence making it more budget friendly for them to take out car loans or mortgages. This accessibility to affordable credit can go a long way in boosting investment and consumer spending. It can also impact the broader economy in a positive manner. Fed’s policies can influence savings rates as well, with lower interest rates typically leading to lower returns on fixed-income investments and savings accounts.
