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    Federal Reserve and Margin Rate

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    The Federal Reserve Bank controls the margin rate on stocks. In the current economic climate, what action would you expect for the Fed to take on this rate and why? (i.e. what is the expected general economic effect of raising, lowering, or leaving unchanged the stock margin rate?)

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    Step 1
    The Federal Reserve Bank controls the margin rates on stocks through Regulation T. This is The Federal Reserve Board regulation that governs customer cash accounts and the amount of credit that brokerage firms and dealers may give to customers for buying securities. I would expect the stock margin rate to be kept unchanged. The current rate is 50% and I expect Federal Reserve to keep the rate unchanged.

    Step 2
    The effect of increasing the margin more to allow more debt can lead to instability in the stock markets (a). On the other hand decreasing the margin further can reduce the ability of investors to buy and sell shares and ...

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    This solution explains Margin Rate. The sources used are also included in the solution.