Free Essay: The Federal Reserve Cutting Minimum Unreasonable Interest and Fed-Funds Rates

The article is about the Federal Reserve cutting minimum unreasonable interest and fed-funds rates, which do not provide much stimulus to the finances of people and businesses. However, when asked why, the federal reserve chairman, Jerome Powell, depicts that the committee of the federal open market wants people and businesses to be protected against downside risks such as inflation persistence below its 2% target, slower growth abroad, manufacturing slowdown, and trade disputes (The Editorial Board, 2019). The action, thus, is a monetary policy, which the federal reserve depicts as insurance that strikes people because that is what people say when they lack a perfect reason to ease policy. Moreover, according to Mr. Powell, the action was a mid-cycle policy adjustment instead of the start of a longer-term cutting of rates period for the economy to be saved from the looming recession (The Editorial Board, 2019).

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Order now

When markets heard about the adjustment, they were forced to promptly sell-off on the hint that the deducted rate would be the last one this year. As Mr. Powell continued with his speech, some press reporters noticed that there was a problem in the enacted rate-cuts, which prompted them to inquire more from Powell (The Editorial Board, 2019). On realizing that the unfair action would be noticed and aired live, Powell half corrected himself with unclear explanations. Nevertheless, as time progressed, the federal board of governors unanimously voted to reduce the rates of interest on the excess bank reserves from 2.35% to 2.1% (The Editorial Board, 2019). The action would then act as an incentive for banks to grab fewer federal reserves and use the generated finances to be more functional in the real economy.

Relationship Between the Article and Other Topics

Bonds are always issued by local, state, and federal governments or United States government agencies and corporations. The primary types of bonds are Treasury securities, which are granted by the American treasury department through the Public Debt Bureau. Their maturity dates differentiate them, that range from approximately one month to 30 years. The treasuries are the same with the article such that they are backed by the federal reserve and the American government as to the timely payment of interest and principal.

There are also corporate bonds that are always connected with higher potential yields. The bond relates to the article as the risk and value both rely on the financial reputation and outlook of an organization issuing the bond. Additionally, zero-coupon bonds are always issued at a steep discount redeemed for its entire value after maturity. The bonds are similar to the article as they have long maturity rates that can give business people have enough time to invest. The main characteristics of bonds are that they are always a form of debt that investors pay to organizations issuing the bond for a specific period. Bonds also have a fixed date of maturity and often repay the principal amount upon the date of maturity.

A bond valuation can be done using the present value technique where one must first understand the pattern of cash flow of the bond, the preferred relevant discounting factor, and the cash flows discount found in the former using the rate of discount found in the latter. Nonetheless, bonds and interest rates have an inverse relationship such that when new bonds are given out with a high rate of interest as opposed to the current bonds in the market, the existing bonds' price will decrease as their demand will be low. Equally, when new bonds are given out with a low rate of interest than the current bonds in the market, the existing price products will be higher in line with demand.

Reference

The Editorial Board. (2019). The Fed Buys 'Insurance.' WSJ Opinion. Retrieved from https://www.wsj.com/articles/the-fed-buys-insurance-11564614697