Seventh, it would ensure that the amount of money in circulation as measured by
M-1, M-2 or M-3 would be adjusted based upon market conditions as measured by accurate
and unbiased economic measurements and reporting. This would be achieved with 100%
transparency in all data gathering and statistical methods, allowing the market to
'police' the government.
Eighth, it would create effective controls that integrally monitor the overall money
supply in relation to the cumulative prices of all asset classes. Such a system would
essentially eliminate any measurable inflation and would self-adjust the amount of
money in circulation.
Ninth, if interest rates were allowed, they would be set by the free market. This
means no more long term inflation or deflation.
Ways the Federal Reserve Affects You and Your Money
1. Mortgage rates The interest rate you pay on your mortgage is probably the most
well-known way the Fed can affect your pocketbook. Mortgage rates closely follow
the yield of 10-year U.S. Treasury bonds, so if the Fed wants to influence rates,
all it has to do is adjust the discount rate up or down (remember, a higher discount
rate should stifle lending practices among banks), or move its federal funds target
rate up or down. Since 2009, the Fed's policy of keeping the federal funds rate target
at record low's has allowed homeowners to refinance or purchase homes at some of
the lowest interest rates we've seen in decades.
2. Auto loan rates Another common way the Fed influences your big purchasing decisions
is through the federal funds rate, which is the overnight lending rate that banks
charge when lending between one another. The 10 largest U.S. banks collectively set
the prime rate, or the lowest rate commercial customers are charged, off of the movement
of the federal funds rate.
The federal funds rate, and the prime rate, are also critical in setting auto loan
rates. Typically, auto loan rates move up or down in tandem with the prime rate.
If the Fed wishes to effect change on the prime rate, it can do so by purchasing
or selling short-term U.S. Treasuries.
3. Credit card rates You're probably noticing a trend by now, but the credit cards
in your wallet are intricately tied to the movements of the Fed. Based on the Federal
Reserve's movements in short-term U.S. Treasuries, the federal funds rate and the
prime rate help lenders determine what they'll charge consumers in interest on their
credit card. A rising federal funds target rate should lead to a rising prime rate,
and thus a higher interest rate charged to variable rate credit card holders.
4. The price of goods and services (indirectly) The Fed's control over the money supply
can also have an indirect correlation to the price you pay for everything from a
$4,000 couch to a $1.99 stick of butter.
For example, during a recession (and as we witnessed during quantitative easing programs)
the Fed may choose to increase the money supply at a more rapid pace than normal
to spur lending. This increases the supply of money and it encourages consumers to
spend. Increasing the money supply, if the economy is in good shape, can also make
it easy for businesses to raise prices, thus leading to inflation. Some inflation
is typically optimal, but high levels of inflation would be bad news for the U.S.