One of the most effective methods for advancing and improving financial knowledge is the use of legislation and public policy initiatives. Individual Development Accounts, for example, are a legislative program started in the mid-1990s to assist low-income earners in building assets (Auclert, 2019). In conjunction with this policy, the Savings Are Vital for Everyone’s Retirement Act included a significant education campaign (Saving Matters). Furthermore, the US Treasury integrated a consumer awareness campaign in its EFT ’99 plan for the transformation to an all-electronic operation. Since contemporary welfare reform laws do not necessitate it, most programs incorporate basic financial planning advice as part of membership training. A breakdown of how to raise the public’s interest in monetary policy, the impact of the federal reserve’s high interests, and inequality resulting from low rates form the basis of this paper.
Raising Citizens’ Interest in Monetary Policy
By controlling the amount of money in circulation, central banks can increase public interest in monetary policy. This is further accomplished through the use of open market operations, which involve the purchase of treasury bonds. Central banks buy government securities from commercial banks and institutions to boost the amount of money in circulation. This increases bank assets, allowing them to lend more money (Auclert, 2019). Such expenditures are done by central banks as part of an expansionary monetary policy, thus affecting citizens’ saving and borrowing patterns.
Additionally, the Federal Reserve employs open market operations to achieve a predetermined funds rate, which refers to the rate at which banks extend credit to other financial institutions. The federal funds rate is determined by the average of the premiums negotiated by each lending-borrowing dyad. As a result, this rate influences nearly all interest rates that are used by commercial banks to lend money to the general public. The section below highlights the effect of the federal reserve maintaining high borrowing rates.
Impact of Federal Reserve’s High-Interest Rates
If the federal reserve had not lowered the interest rate, there would be a rise in the prime rate, commonly referred to as the Bank Prime Loan to Value ratio. The prime rate is the borrowing price offered by banks to their clients who have excellent credit scores. Other types of personal loans are predicated on this value, as a higher prime rate implies that banks will raise fixed borrowing charges when performing risk evaluation on less creditworthy enterprises and households. An increase in prime rate consequently results in higher money market and certificate of deposit rates (Brookings Institution, 2015). Theoretically, this should increase business and consumer savings as they will get a better return. Additionally, individuals with a debt burden may strive to repay their financial commitments to counterbalance the higher fixed rates relating to credit cards, mortgage loans, or other borrowings. The section that follows discusses some of the consequences of prolonged low-interest rates.
Inequality Resulting from Federal Reserve’s Maintaining Low-Interest Rates
From my perspective, I would not recommend the federal reserve keep interest rates low for a long time. This is because the emergence of unfavorable business cycles experienced within the last few decades is a result of the Federal Reserve maintaining a near-zero interest rate policy. Additionally, prolonging these low rates encourages economic inequality by widening the wealth gap (Dorfman, 2015). The Federal’s low-interest rates are widely thought to be the reason for the inflated stock market prices. Wealth disparity has become worse as a result of the Federal’s role in escalating stock prices since individuals who are wealthier hold more shares for speculative motives. Concurrently, the low-interest rates have resulted in affordable borrowing costs for big businesses with easy access to capital markets.
References
Auclert, A. (2019). Monetary policy and the redistribution channel. American Economic Review, 109(6), 2333-67. Web.
Brookings Institution. (2015). Inequality and monetary policy, conventional and unconventional. Web.
Dorfman, J. (2015). The Fed’s low-interest rates are increasing inequality. Forbes.