federal reserve?

Question

why does the federal reserve focus primarily on controlling commercial bank lending as opposed to other financial intermediaries lending?

yeah..i know it's tough..it was from my economics exam and i wanted to see if i put anything in the same range as what you guys said!

Answer 1

That was what they were originally organized to do. Much of the other falls under scrutiny by organizations like the Securities and Exchange Administration or the Treasury Department, along with a plethora of front line government agencies in the various state and even city governments.

Answer 2

Fed interferes in lending through control of the Reserve requirement. For every dollar saved they will require banks to keep aside or deposit with Fed around 5% of it as reserve. If the Fed want contractionary policies meaning if the the National income is rising faster than the targeted rate then they will initiate contractionary policies one of which is this reserve requirement policy through which they control credit. Less credit leads to less production and lowering of rate of growth in National income. Other tool is the Money supply which will be reduce by issueing more t bills. This will take away people from saving thus controlling the credit and even consumption.
Other financial intermediaries like Investment Bankers help in Investments not to generate more consumption. They also participate sometimes in t bill auctions.

Answer 3

I don't think the Federal reserve control any commercial bank lending. They do control the federal funds interest rate either by raising or lowering this rate. By raising this rate, it will cost more for consumers to borrow money. This is trickled down from the federal funds rate to the discount rate and the prime interest rates. Everyone pays more to borrow when rates rise. By lowering the rates, it cost less to borrow for the consumers. This may be immediate or a take a little time to go through markets and affect mortgage rates, consumer loans, corporate loans (usually the prime rate), which then would cost less through lower interest rates. As for what banks eventually charge their customers (individuals / corporates or other banks), it eventually has to raise or lower to remain competive and get the business of making these loans. This is how the federal reserve influences banks/consumers/businesses through the FOMC's monetary policy.

Answer 4

The fed controls the whole mess at the root. It sets the rate at which banks loan each other money. After that, to simplify, the invisible hand takes over. If you need a highly speculative private debt loan from a private equity or hedge fund, you will pay a big premium, but, at some level, the rate will relate to the fed funds rate by some risk-driven function. Why? Because lenders earn profit on spreads-- they can borrow money at some rate of interest (or loan equity, on which they have to earn some level of return), and they try to loan it at a higher rate that offers a little profit. So it would be a waste of time, energy, money, and our general free market sensibility as Americans, for the Fed to work differently with rates.

Answer 5

That's a tough question! My immediate answer would be that certain things need to be centralized versus decentralized. It's like comparing nations to individuals in a way or micro economics versus macro economics. In order to keep a nation organized, it's easier if you have a central banking system with one reserve (like gold say) than it is to monitor and audit a number of different sources (like estimated baskets of various goods). If a number of different banks were to do this, it may increase the chances of more human error and other errors, resulting in unreliable reserve amounts, which would, in turn, effect the ability of individual banks to lend money to individuals for loans to individual people and businesses (in the micro economic community).

Answer 6

The FOMC primary tool for controlling inflation is through interst rate. This is the most effective tool as it is immediate has instant affect.

Answer 7

They concentrate on commercial because they are commercial. Your local bank is an extention of the fed A.K.A. franchise.