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Yesterday US President Trump criticized the US Federal Reserve Board for increasing interest rates in June, the fifth increase since he took office in January 2017. On June 13, the Fed increased the federal funds target rate to 1.75-2% and the primary credit rate to 2.5%. Trump argues that the interest rate hikes slow economic growth. The country's historically low unemployment rate and highest inflation level since 2012, however, support the Fed's move to increase rates. Two more rate hikes are anticipated for 2018.

 

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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Download our latest US ECONOMY cheat sheet

The US economy has extensive influence on global economic dynamics. Download our US Economy cheat sheet to stay up to date with easy access to the most critical data from leading sources.

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