The United States in the event of a recession or depression
Part A: Explain how the Federal Reserve Board, or the Fed, might assist the United States in the event of a recession or depression with examples. You can use the recent 2007 recession as supporting information. Discuss the tools that the Fed uses to adjust money growth. Be sure to integrate the responsibilities or functions of the Fed into your response.
Part B: Perform research on financial service institutions in your geographic area. Describe in detail the financial services that each provides, comparing interest rates, fees, and investment options. Which financial service institution do you think is best and why?
Monetary Policy Tools
Fiscal stability is the primary goal of the federal financial system and the Federal Reserve Board or the Fed assumes a pivotal role in ensuring that such a reality prevails. The United States Central Bank strives to attain its dual mandate which involves maintaining price stability and low unemployment rates across the economy. Unfortunately, recessions threaten this stability by triggering deflation, which is usually characterized by high unemployment rates and low prices for consumer products. The Fed’s role in promoting economic stability during recessions should not be underestimated given the fact that deflations compel businesses to engage in mass employee layoffs, asset disposal, and even file for bankruptcy. In the wake of such a scenario, the Fed can leverage one or more of the three monetary policy tools including open market operations, discount rates, and reserve requirement (Ashraf, Hassan, & Hippler, 2017). This article presents a discussion on the invaluable roles of the monetary policy tools available for the Federal Reserve Board during economic downturns. The primary objective of this essay is to enhance the readership’s grasp of how financial institutions operate. The second part will briefly explore the financial services offered in the state of New York.
Open Market Operations (OMOs)
OMOs is one of the most instrumental tools available for the Fed to stabilize the economy through buying or selling of securities from member banks. Notably, these securities typically include mortgage-backed securities or treasury notes. Open Market Operations can be either contractionary or expansionary to resolve inflation or deflation respectively (Federal Reserve, n.d). Considering the scope of this paper, focus will be placed on the latter since it is essential during recessions. As the United States’ central bank, the Fed can create money out of nowhere. This move is usually facilitated by the purchase of securities through credit. Such an approach allows banks to have additional money to lend people in a starving economy, thus increasing the amount of money in circulation as well as the country’s economic activities.
It is important to understand that banks benefit through the interest rates on loans offered to the public (mainly businesses) while the economy thrives once business entities are given loans to support their operations. It suffices to highlight that the Fed applies caution by ensuring that each bank has a predefined percentage of its total deposits overnight to facilitate transactions in the following day. This policy also affects interest rates since the amount of money in circulation is inversely proportional to the interest rates. The Fed’s response to the 2007-2008 financial crisis seems illustrious at this point. The Fed implemented Quantitative Easing (QE), an unconventional open market operation approach, which involved the purchase of long-term securities including mortgages and bonds to relieve financial institutions from the huge burden (Ashraf, Hassan, & Hippler, 2017). This move increased money supply for the public by almost 4 trillion dollars while reducing the debt held by banks.
Liquidity is a crucial element of financial stability, since it allows business operations to proceed with limited interruptions. This aspect is also vital in ensuring that consumers have access to money to meet their needs at any given time. During recessions, the cash flow of a country is usually low, since business operations and employment rates decline (Federal Reserve, n.d). The Federal Reserve Board ensures that the economy can provide money when eligible people need it. Reserve requirements have significant impact on money supply and interest rates. High requirements reduces the amount of money available for banks to lend while lowering the same has a contrary impact. For the sake of clarity, it is important to reflect on the recent COVID-19 response by the Federal Reserve Board. This board reduced the reserve requirement ratios to zero percent as of 26th March 2020 (Federal Reserve, 2020). This tactic has allowed banks to have additional funds to lend businesses and other eligible persons. Since low requirement enhances money supply and circulation within consumer markets, interest rates decline significantly. As of now, average interest rates for United States bank loans have declined to approximately 1 percent (Federal Reserve, 2020). Since this move is bound to increase liability following a surge in withdrawal rates, the federal government released a stimulus package as a safety net for banks with low reserves safeguard operations while loaning citizens.
This tool allows banks to borrow from the Federal Reserve at rates that are slightly lower than that offered by other member banks. Discount rates are often underutilized by banks due to the stigma attached to the fact that it is available to institutions that can barely borrow funds from fellow banks. Institutions that utilize this discount window are often considered desperate, and rejected by fellow entities in the financial community. During the 2008 recession, many banks had bad loans on their books, so the Fed decreased its rates to zero, to entice banks to borrow from so that they could alleviate their financial burdens (Ashraf, Hassan, & Hippler, 2017).
Financial Service Institutions
J.P Morgan Chase is a New York-based financial service institution that allows its members to invers in the money markets, mainly through options trading. This organization facilitates its fiscal trade operations through its DIY brokerage account known as Chase You Invest. The minimum deposit for a portfolio with this bank is 500 dollars, and the fee on assets is 0.35 percent (Chase, n.d). This brand’s interest rates range from 0.01 to 0.09 annual percentage yield depending on the deposit. Fairly stating, this brand is recommended for high-income customers seeking to boost their finances through options trading on the organization’s platform.
Like Chase Bank, Goldman Sachs is also a New York-based institution that offers somewhat similar services to a retail consumer base. This organization builds its pride on its widely-embraced consumer banking option. Goldman Sachs offers no limits on its deposits: consumers can open an account with zero deposit as long as they fund their portfolio within a 60-day period. This account gives members access to annual percentage yield of 1.55 percent, which is four times the national average (Goldman Sachs, n.d). Interestingly, with such financial rewards, this financial service provider does not take any fee from consumers’ savings accounts. On top of that, Goldman Sachs offers personal loans at zero fees while allowing customers to withdraw no-penalty funds at any given time. When placed into perspective, this bank is convenient for consumers seeking to minimize fees on banking services (mainly loans and savings) and maximize annual yields.
As highlighted, each of these banks offer specific advantages to specific consumers. J.P Morgan is convenient for high-income customers seeking to maximize their finances through trading options while Goldman Sachs is designed for consumers seeking to save their money, access loans, and increase their income on an annual basis. As a typical finance-critical consumer, this paper’s author prefers the latter option since it allows its customers to operate on a low-risk basis.
Financial stability is the primary goal of every nation, including the United States. For this reason, the government utilizes its Federal Reserve Board to realize such a progressive vision, even during trying times such as recessions. During economic downturns, the Federal Reserve implements a broad range of tools including open markets operations, discount rates, and reserve requirements. These options allow the system to control the supply of and demand for money in a manner that promotes economic development and price stability. New York is one of the regions graced with competent financial service institutions such as J.P Morgan Chase and Goldman Sachs. These institutions offer distinct financial options to favor different types of customers. An individual seeking to maximize income through annual percentage yields should consider the latter as it offers low-risk services.
Ashraf, A., Hassan, M. K., & Hippler W. J. (2017). Monetary shocks, policy tools and financial firm stock returns: evidence from the 2008 us quantitative easing. The Singapore Economic Review, 62(01), 27-56. Retrieved from https://www.worldscientific.com/doi/abs/10.1142/S0217590817400021
Chase. (n.d.). You Invest Portfolio: Frequently asked Questions. Retrieved from https://www.chase.com/personal/investments/you-invest/faqs/portfolios
Federal Reserve. (2020). Coronavirus Disease 2019 (COVID-19). Retrieved from https://www.federalreserve.gov/supervisory-regulatory-action-response-covid-19.htm
Federal Reserve. (n.d). Monetary Policy. Retrieved from https://www.federalreserve.gov/monetarypolicy.htm
Goldman Sachs. (n.d). Consumer Banking. Retrieved from https://www.goldmansachs.com/what-we-do/consumer-and-investment-management/consumer-banking/