Microeconomics

The Federal Reserve uses the monetary policy tools in an effort to influence credit price and therefore, promote the growth of national economy.  With the responsibility to set the monetary policy, the institution is mandate with promoting sustainable output in the economy and employment, and stabilizing prices (Lee, 2015).  The Fed is unable to use the tools in influencing production output and employment, and controlling inflation directly. In order to achieve this, it influences them indirectly through discount rates, operations in open markets and reserve requirement. By the use of the above tools, the Federal Reserve is able to alter the demand and supply for commercial banks reserve balances found at the central bank. Through this, it can influence the federal rate of funds, which is the banks’ interest rate for lending to other banks with reserves that falls below the requirement (Lee, 2015).

 While trying to stimulate economic growth, the Federal Reserve cuts the interest rate, so that the banks can lend money to business and individuals at lower rates. This leads to increased production output and creation of more jobs which increases employment.  Hence, when the Federal Reserve wants to improve economic growth, it increases the volume of money in the market which leads to low rates of interest (Sexton, 2015). When there is much money in the market, so that it leads to inflation, there is more demand for services and goods, and this means the products value inflates in proportion to value of money used to buy it. The Federal Reserve embarks on reducing the amount of money in the market by raising the rates to strike a balance between the money supply and goods or serves value.

The Federal Reserve policies are important since they also influence the stock market. The tools are used by the authority to affect employment and output over the short term and can also be necessary in smoothing out the general business cycle (Sexton, 2015).

Despite Weak Inflation, Fed Is Likely to Raise Interest Rates in June

This article suggests that the Federal Reserve is likely to raise the interest rates after the June meeting and supports this likely decision. The economy has been showing sign of weakness in the past several years, but the authority is likely to raise the rates even though the inflation is lower than desired. An analyst quoted in the article believes it makes sense to raise the rates and thinks that policy normalization policy in regard to the interest rates should continue gradually. This is because consumer spending had become strong, while unemployment continued to decline meeting the expectation set by the Federal Reserve (Appelbaum, 2017).