The Impact Of Increase On Federal Reserve Fund Rate On Cost Of Capital

1561 Words Nov 15th, 2016 7 Pages
The Impact of Increase on Federal Reserve Fund Rate on Cost of Capital
Introduction
One of the ways in which Federal Reserve deals with inflation, unemployment and slow economic growth is through the use of various monetary policies. Monetary policies aid in dealing with inflation, unemployment and flow of money in the economy (Arnold, 2010). One of the monetary instruments used by the Federal Reserve is fund rate. According to Arnold (2010) fund rate can be defined as the interest rate which depository institutions lend the funds held by the Federal Reserve to other depository institutions overnight. The fund rate has a direct impact on the supply on money in the economy as well as the cost of capital. In the recent months, Federal Reserve has maintained its fund rate at ½ percent after increasing it from ¼ percent in December, 2015 (Lam, 2016). The increment of the fund rate from ¼ percent to ½ percent has impacted directly on the cost of borrowing in the U.S economy (Cox, 2016). The Federal Reserve’s monetary policies on fund rate have a direct impact on the cost of borrowing. The main objective of this paper will be to review the impact of Federal Reserve’s increase of fund rate from ¼ to ½ on cost of borrowing in the U.S market.
Monetary Policies The monetary policies are used by a country’s central bank with an objective of regulating the flow of money in the economy, inflation and enhancing economic growth (Berentsen et al, 2007; Cottarelli and Viñals, 2009).…

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