Fed Established By Congress

The US Federal Reserve has been in the news frequently for the last two months but there are many who have no idea just what the Federal Reserve does and what function it serves. Established by Congress in 1913, the Federal Reserve was designed to present the country with a more secure, more elastic, and more stable economic and financial structure. The Federal Reserve is also in charge of monetary policy and the management of banks. Probably the most important function of the Federal Reserve is to regulate the money supply so as to keep production, prices, and employment stable.

Fed Monitors the Economy

The economy is always best when it is growing. People have jobs, businesses are able to produce and the quality of life for the average citizen is better. When the economy is not growing the opposite takes place. Unemployment, a lack of productivity, and a lower standard of living are the sign of a downturn in the economy. The Federal Reserve has been entrusted by Congress to take measures to insure stability and to control inflation and interest rates. The actions of the Federal Reserve have profound effects on global interbank forex markets.

Setting Stable Interest Rates

Both business owners and consumers are concerned about interest rate stability. The US is a credit oriented society and stable interest rates are essential for the national economy to function. Without stable interest rates businesses and consumers find it difficult to plan for the future. The Federal Reserve sets basic bank lending rates and banks pass on any increase or decrease in rates to consumers. The rates set by the Federal Reserve also affect interbank forex lending.

Monitoring the Financial Sector

Maintaining the overall stability of the financial system is one of the top priorities of the Federal Reserve. A stable financial system allows businesses and students to get loans, and consumers to purchase goods and services. When the integrity of the financial system is threatened the Federal Reserve can institute corrective policies. Recently the Federal Reserve pumped billions into the banking system to rescue ailing banks and to ensure the availability of credit on both domestic markets and interbank Forex.

Maintaining A Strong Dollar

The US dollar is the world’s reserve currency and the Federal Reserve is charged with ensuring the stability of the US dollar. A strong dollar is essential for the US economy. Despite the near collapse of the US banking system and negative economic indicators the US dollar remains strong. A strong dollar will significantly contribute to economic recovery in the US and monetary policies set by the Federal Reserve are designed to have that effect.

The Fed and the Bailout

The Federal Reserve has been under immense pressure recently from congress and the public. Testimony before congress by Federal Reserve officials convinced many in congress to vote for the politically unpopular $700 billion dollar bailout bill. After weeks of uncertainty the effects of the bailout are starting to be felt by the financial sector. The dollar is doing well on Forex markets against most currencies except the Japanese Yen. Investors are turning to both the Dollar and the Yen for risk aversion.

In today’s global economy any action by the Federal Reserve can have global repercussions. In this time of volatile markets one can only hope the Federal Reserve continues to make the right decisions. The actions of the Federal Reserve could well affect interbank Forex markets well into the future.

Greenspan Before Congress

In a statement to the House Oversight Committee former Federal Reserve Chairman Alan Greenspan stated that the current financial crisis is a “once-in-a-century credit tsunami” which will have a severe economic impact on the nation’s economy and will drive unemployment higher. Greenspan also stated that the current financial crisis had “turned out to be much broader than anything that I could have imagined.” The current economic meltdown has affected interbank Forex markets and the rates charged for interbank lending.

Greenspan, John Snow, and Christopher Cox Testify

Greenspan was called to testify by the committee along with former Treasury Secretary John Snow and Securities and Exchange Commission Chairman Christopher Cox. Committee chairman Henry Waxman (D-Calif.) said that the Federal Reserve, the Securities Exchange Commission, and the Treasury Department had all contributed to the current financial crisis. In a strongly worded statement Waxman said, “The list of mistakes is long and the cost to taxpayers is staggering, our regulators became enablers rather than enforcers. Their trust in the wisdom of the markets was infinite. The mantra became that government regulation is wrong. The market is “infallible.”

Greenspan Places Blame on Subprime Mortgages

In his testimony before the committee Greenspan blamed the crisis on heavy demand for securities backed by subprime mortgages by investors who never thought that the housing market would crash. Greenspan said that for the crisis to end stabilization in home prices is necessary and that it would take many months for this to happen. Greenspan gloomily predicted, “Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment. Fearful American households are attempting to adjust, as best they can, to a rapid contraction in credit availability, threats to retirement funds and increased job insecurity.”

Greenspan and Bush Administration Criticized

Greenspan predicted that when home prices stabilize the credit markets should begin to thaw and renew investor confidence. Greenspan also said that government is correct to aggressively proceed with efforts to support the financial sector of the economy and also thought that the $700 billion dollar bailout is adequate to move markets forward. Some blame Greenspan and the Bush administration for ignoring warning signs and stubbornly believing that the market is always right and regulation is not an appropriate government function. Greenspan served during a period of relative stability and interbank forex markets were profoundly affected by the actions of the Federal Reserve.

Greenspan placed the blame for the current crisis on over eager investors who did not worry that the boom in home prices might come to a crashing halt. Greenspan’s critics believe that earlier in the decade he left interest rates too low spurring an unsustainable housing boom. The hearing got contentious as lawmakers who are already angry about having to vote for the politically unpopular bailout bill searched for answers to what went wrong. Holding hearings close to an election is unusual but chairman Waxman said the crisis was so serious that Congress could not wait until a new administration arrives in January to find out “what went wrong and who should be held accountable.”

Recession, the US Dollar and Interbank Forex

On Forex markets the US dollar has been doing surprisingly well but many analysts believe that if the US enters a recession all bets are off for the dollar. Of course savvy Forex investors and traders will be watching the US economy closely for any signs of trouble and will invest accordingly. The Forex markets will remain the largest in the world and will continue to offer alert investors plenty of opportunities. The actions of the Fed could affect interbank Forex exchanges well into the future.

USD Currency of Choice

While the performance of the US dollar has baffled some experts the question remains: how long will this strong performance in currency markets last? At present, the US dollar seems to be the currency of choice despite the negative performance of the US economy. The fundamentals of the US economy are deteriorating, housing markets, stock markets, productivity, the recent collapse of several venerable Wall Street firms, and a lack of investor and consumer confidence all spell trouble in the near future. At present there are several factors that contribute to the dollar’s success. The dollar at present is the world’s reserve currency and is essential to the performance of interbank Forex markets.

Fast Action By US Government Calms Investors

The quick reaction of the US government and its institutions and the cooperation between the two major parties had a calming effect on investors and probably prevented a total market collapse. In the United States the problems are transparent and the willingness of government to try several approaches to reach a solution may inspire confidence in some. Credit markets remain a concern and most realize that it will be quite some time before the effect of the $700 billion dollar bailout will be felt. The infusion of cash has been slow to affect interbank Forex markets.

European Economy Deteriorates

The European economy is deteriorating rapidly despite the efforts of central banks to stimulate liquidity in credit markets. The UK is experiencing its own mortgage meltdown complete with collapsing banks and lowered real estate values. Many European financial institutions invested heavily in mortgage backed securities which are now worth a fraction of their original value. The French and German economies are experiencing accelerated economic slowdowns. Despite the actions of the central banks and governments credit markets remain frozen to the detriment of the European economy and has severely affected interbank Forex exchanges. The Euro has been declining against the US dollar.

Fallout Affects Asia

The fallout from the American economic crisis has affected Asian markets and economies. In Singapore, economists are predicting a downturn lasting several quarters and China is experiencing a significant slowdown. The declining demand for commodities has adversely affected both the Australian and Canadian dollars. The Japanese economy is expected to be affected by the crisis in the US. Japanese automakers expect to see a decline in US sales, the US being the largest market for Japanese automobiles.

Forex Markets

In the short term the economic troubles in the US are actually helping the dollar to retain its value. Whether the US enters a recession will determine the future of the US dollar in the medium and long term. At present the dollar continues to offer opportunities in Forex markets although it remains a mystery just how long it will last. The dollar continues to be the currency of choice on interbank Forex markets.