There are times when the goals of the FED are in congruence

\"There are times when the goals of the FED are in congruence with those of commercial banks and there are times when they are in conflict.\" Do you agree with the statement? Why or why not? Limit your response to one paragraph.

Solution

Yes, there are times when two banks\' goals are in conguenrence and there are times when they are in conflict. Their goals are in congurence when fed used open market operations. When fed buys securities, people have more cash which they deposit in banks and their lending capacity increases and when it sells bonds, their currency holdings decrease and they approach banks for loans. In both cases it is at profit. But it is in conflict when FED used reserve requirements or discount rate. Suppose, fed has increased reserve requirements. It has been done to control inflation in the economy. But a commercial bank is not concerned with inflation in the economy but it is concerned with its profits. With increased reserve requirements, it can lend lesser funds and its profits will decline. Similarly, commercial banks may not like increase in discount rate as it will increase cost of borrowing for commercial banks and thereby forces them to charge a higher rate of interest from consumers. It affects demand for loans and thereby their profits.