International Journal of Business and Social Science

ISSN 2219-1933 (Print), 2219-6021 (Online) DOI: 10.30845/ijbss

Global Economic Consequences of the Latest Federal Reserve Policy Tool
David M. Gordon

The Federal Reserve System(Fed) plays a vital role in our economy as our central bank. The main purpose of this paper is to show how the Fed’s newest policy tool can impact the exchange rate (and thus trade patterns) within a country. This paper will review the three traditional functions of the Federal Reserve System with regards to monetary policy. It is imperative that anyone with economic interests understand the importance of this role. Knowledge of how the Fed or any central bank conducts monetary policy has become even more important to grasp given the recent worldwide falls in stock valuations as well as the still unfolding events in Great Britain (Brexit). A brief history of the Fed is also provided. Many economic participants are not aware of when the central bank first arrived in our economy. The roles and functions of the Fed are explored in the paper as well. This paper also offers an explanation of the traditional tools the Fed uses to conduct monetary policy. Open market operations are explained. The important role of the discount rate is discussed. The required reserve ratios are also explored. The newest tool of the Fed is their ability to pay interest on deposits that member banks keep at the Fed. This new tool is explained and its’ ramifications on exchange rates are explored.

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