Blog 2

Money: The Hero

The term ‘money makes the world go round’ is a very common saying with a lot of truth. The Bible says “money answereth all things.” (King James Version, 2022, Ecc.10:19). But where does it come from? In the United States, the Federal Reserve or “The Fed” was created in 1913 and consists of 7 Board members selected by the U.S. President, and “confirmed” by the U.S. Senate. (Board of Governors of the Federal Reserve System, 2016). The Fed has 12 regional reserve banks in various cities in America to serve as the central bank’s extensions and help to gather the necessary information needed for the effective development of monetary policy in America. (Board of Governors of the Federal Reserve System, 2016).

Fed Duties

The Fed has many roles and responsibilities. The purpose of the Fed is not only to be the central bank of the United States or “the government’s bank and the banker’s bank”, but it also “manages the issuing, transferring, and redeeming of U.S. Treasury bonds, bills, and notes.” (Board of Governors of the Federal Reserve System, 2016; Cowen & Tabarrok, 2021, p.733). The role of the Fed is to create money, buy government bonds, and be the lender of last resort. (Marginal Revolution University, 2021).

The Fed can also buy and sell government bonds called Treasury bills or “T-bills” in order to change the money supply. (Cowen & Tabarrok, 2021, p.738). This is called an “open market operation.” (Cowen & Tabarrok, 2021, p.738). With this ability, the Fed can increase or decrease the reserves at the banks allowing banks to have more money to loan out to those who need it most.

Different policies are implemented by the government to help the economy function better. “Fiscal policy is federal government policy on taxes, spending, and borrowing that is designed to influence business fluctuations.” (Cowen & Tabarrok, 2021, p.805). Tax cuts and increase of the government spending are two examples of fiscal policy the government uses to combat recession. (Cowen & Tabarrok, 2021, p. 805). Monetary policy however refers to the actions that central banks perform to achieve policy objectives like “price stability, full employment, and stable economic growth.” (Board of Governors of the Federal Reserve System, 2017). Although there is a noticeable “lag” time when monetary policy takes effect, it is much shorter than with fiscal policy. (Cowen & Tabarrok, 2021, p.812).

Federal Policy findings 2019 - 2021

Feb 2019 - “The Federal Reserve's total assets declined about $310 billion since the middle of last year and currently stand at close to $4.0 trillion.” (Powell, 2019). According to Powell (2019), at that time the economic conditions were considered “healthy” and had a “favorable” futuristic outlook; however, Chairman Powell did speak about noticing conflicting signals including “volatile” financial markets near the end of the year. He also stated there was slow growth in major economies like Europe and China as well. (Powell, 2019).

Feb 2020 – Jobs were steadily on the rise. (Powell, 2020). “Gross domestic product rose at a moderate rate over the second half of last year.” (Powell, 2020). According to Powell (2020), the FOMC adjusted the second half of 2019 to accommodate for “weaker global growth and trade developments and to promote a faster return of inflation to our symmetric 2 percent objective.” (Powell, 2020). Declining interest rates were of a concern at the time. “This low interest rate environment may limit the ability of central banks to reduce policy interest rates enough to support the economy during a downturn.” (Powell, 2020).

Feb 2021 - Though Covid-19 had a tremendous impact on the economy, things really started turning around for the good. According to Powell (2021), “The housing sector has more than fully recovered from the downturn, while business investment and manufacturing production have also picked up. The overall recovery in economic activity since last spring is due in part to unprecedented fiscal and monetary actions, which have provided essential support to many households, businesses, and communities.” (Powell, 2021). “With this change, we aim to keep longer-term inflation expectations well anchored at our 2 percent goal.” (Powell, 2021).

Global & Domestic Impact on McDonald’s: 2019-Present

These changes have certainly impacted McDonald’s in a positive way. According to Creswell (2022), McDonald’s recent financial report showed global revenues of $23 billion which is an 21% increase since 2019 which is the highest it has been since 2016, and a domestic revenue spike of 13.8% from one year prior. McDonald’s also had to increase its menu prices approximately 6% due to the rising cost of food and paper which grew to about 4% last year. (Creswell, 2022). Despite recent pandemic, McDonald’s is clearly progressing forward.

Moving forward

Decreasing interest rates reduces the cost to businesses and individuals of borrowing funds to make new investments and purchases. Conversely, increasing interest rates raises the cost to businesses and individuals of borrowing funds to make new investments and purchases. The Federal Reserve can conduct monetary policy in a complementary nature to fiscal policy, offsetting the rise in interest rates by decreasing the federal funds rate. Alternatively, the Federal Reserve can pursue a policy that offsets stimulus, pushing interest rates up by increasing the federal funds rate. (Congressional Research Service, 2021)