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We like to think that when we deposit a dollar at the bank, it goes into a big vault and we can pull out that same dollar at any time. But that¿s not how the U.S. banking system works. Banks take that money and invest it to make money themselves, so cash gets spread around. This, naturally, leads to a big risk: What happens if those investments go sour? Well, you¿d be out of luck. You can¿t get your dollar back.
The Federal Reserve doesn¿t like that scenario, so it prohibits banks from putting all the cash it has on deposit on the line. In fact, the Fed forces banks to keep a portion of their assets at the Federal Reserve itself, to make sure that some of your assets won¿t get squandered if the bank¿s bets go south. These are called ¿reserves,¿ (hence, Federal Reserve. Got it? Good), and usually amount to 10% of the total cash kept in checking accounts.
These reserves are never exactly 10%, and banks like to keep a little extra in reserve ¿ not, as you might think, to make you more comfortable that they¿re in good financial shape, but rather so they can take that excess and lend it to other banks and make money off it. (They¿re banks, they can¿t help themselves.) The rate at which they make these loans is called the Federal Funds rate, which is set by the Federal Reserve¿s Federal Open Market Committee.
When you hear people chattering about how the Fed cut or hiked interest rates, this is what they¿re talking about: the interest rate banks can charge for lending money from their reserves. This begs the question: If these are essentially loans between banks, why is the Fed Funds rate so important for the rest of the economy?
Well, simply put, because loans make the financial world go round. Bank A lends Bank B $10,000 at a Fed Funds rate of 5%. Bank B then lends out $10,000 to a small business at 7%. The small business then takes that money and expands the business and hires new workers. Now someone is employed, Bank B has made interest off the loan, and Bank A is the richer for making it all happen. It¿s perhaps overly simplistic, but you get the idea. When you want the economy to thrive, you make lending cheaper.
Of course, sometimes you don¿t want the economy to thrive. In fact, you might want it to cool down, mostly to avoid money flooding the system and causing inflation. In that case, the Fed raises interest rates, making it difficult to lend or borrow.
Home / Personal Finance / Financial Planning
Friday, April 25, 2008
FOX Business Network Shopping Cart Rises 0.44% in March
Mark Lieberman, Senior Economist
FOXBusiness
The price for the Fox Business Shopping Cart increased 0.44% in March to $74.33 --almost 6.5% more than the same 32-item grocery basket cost a year ago. At the same time, average hourly earnings increased 0.34% from February to March and 3.6% from March 2007 to March 2008.
The 6.45% year-over-year increase in the cost of the shopping cart is the steepest in three months.
In short, food prices went up significantly faster than earnings and, as a result, it took the average worker slightly longer to earn the cost of the shopping basket. At 4 hours, 10 minutes, the time necessary to work to be able to pay for the shopping basket is the longest in more than two years.
The FOX Business Shopping Cart includes basic food items -- milk, butter, eggs, bread, meat, fruit and vegetables -- as well as fun foods such as potato chips, chocolate chip cookies, soda, beer and ice cream. All the items are tracked by the Bureau of Labor Statistics as part of the monthly consumer price index report.
Prices went up in March for 22 of the items on the grocery list – compared with February when prices increased on 16 items -- led by a 10-cent, or 5.8%, increase in the price of a pound of tomatoes and a 6-cent, or 10.6%, increase in the price of a pound of bananas. Higher grain prices drove up the cost of flour and white bread as well as chocolate chip cookies and malt beverages (beer) for the month although the cost of pasta, which had jumped more than 30% from December to February, dipped a bit in March. Prices for virtually all meat products included in the basket – also related to grain prices – all increase in March.
In addition to pasta, prices in March fell for eight items led by a drop in the cost of dairy products: milk, butter and American cheese. The average price of a half-gallon of ice cream increased. Prices also dropped for lettuce, broccoli and grapefruit.
The overall increase in prices follows a jump in import prices for food products and wholesale prices--with more to come. At the wholesale level food prices, have increased in six of the last eight months. The year-over-year increase in imported food prices--14% -- was the steepest since March 1995.
On a year-over-year basis, prices are up for all but seven of the items in the FBN basket: ham, sirloin steak, grapefruit, round roast, lettuce, sugar and butter. The sharpest increase (in dollars) was the price of a gallon of milk which jumped 71 cents or 23.1% (while the price of a gallon of gasoline increased 58.3 cents or about 21.5%); the price of dozen eggs jumped 57 cents, or 34.8%.
The prices of “comfort foods” remained relatively modest: The cost of a pound of chocolate chip cookies is up just 6 cents or 2.1% in the past year and of 16 ounces of beer up just 1 cents, less than 1%.
[Fox Business intern Adam Samson
contributed to this report.]
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