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President Donald Trump in a tween on December 18 urged the Federal Reserve to “Feel the market, don’t just go by meaningless numbers.” Despite Trump's arguments that the interest rate hikes slow economic growth, on December 19, the Fed increased the federal funds target rate to 2.25-2.50% and the primary credit rate to 3.0%. The country's historically low unemployment rate and highest inflation level since 2012, however, support the Fed's move to increase rates. Though only two rate hikes are anticipated now for 2019, down from three rate raises previously projected by central bank officials.

 

The Federal Reserve - the central bank of the United States - is responsible for conducting the nation's monetary policy through the three tools:

  • open market operations
  • the discount rate
  • reserve requirements

The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, and the Federal Open Market Committee (FOMC) is responsible for open market operations.

 

The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility - the discount window. The Federal Reserve Banks offer three discount window programs to depository institutions: primary creditsecondary credit, and seasonal credit, each with its own interest rate. Under the primary credit program, loans are extended for a very short term (usually overnight) to depository institutions in generally sound financial condition.

 

In the frame of open market operations, FOMC establishes the target range of federal funds rate - the interest rate at which depository institutions lend reserve balances to other depository institutions overnight. The effective federal funds rate is a weighted average of rates on brokered trades.

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