The media pays close attention to interest rates, noting when the Federal Reserve Board's Open Market Committee meets, and the stock and bond markets react to real or anticipated changes in interest rates. Yet many consumers do not understand the interest rates discussed by the Fed and the media; what consumers do appreciate is that many mortgages and other loan rates are based on these figures. This research explores how the Federal Reserve conducts monetary policy, and examines the monetary policy of the last several years.
Background.
The Fed's mission is to protect the integrity of the nation's money by providing a healthy banking and financial system that is consistent with price stability and sustainable economic growth. This basic mission has not changed for the more than 80 years that the Fed has been in existence. Although the purposes and functions of the Fed have not changed over its history, the economic, financial and social environment in which the Fed operates has changed. The Fed, as a result, has transformed itself and the way it does business in response to this dynamic environment.
Today, the Fed is a market-driven and customer-driven entity. It has elements of both the public and private sector in its form, functions and operations. Its primary mandate is public policy, which goes back to the fact that it was created by an act of Congress rather than by the private sector. In this way, the Fed can be considered an instrument of the government that utilizes the language and mechanisms of the private sector. .
The Federal Reserve does not set interest rates directly for mortgages or Treasury bills, or any other financial instruments marketed to consumers. Instead, the Federal Reserve adjusts the discount rate, which is the interest rate at which eligible institutions borrow funds directly from a Federal Reserve Bank. Since this is the foundation on which all other interest rates are based, adjustments in the discount rate affects the interest rates which institutions charge (and pay) their customers.
