Coca Cola - Monetary Policy and Its Affects

Introduction

Coca Cola, like any other business, deals with the affects of monetary policy set by the United States Federal Reserve Bank. The three tools used by the Federal Reserve to control monetary policy are the discount rate (federal funds rate), open market operations (buying and selling of bonds) and the reserve ratio requirement. The following will discuss the monetary policy tools used by the Federal Reserve Bank and its affects on The Coca Cola Company and other businesses.

Federal Funds Rate

By definition, the federal funds rate is the interest rate at which private depository institution (mostly banks) lend balances (federal funds) at the Federal Reserve to other depository institutions, usually overnight. Changing the target rate is one form of open market operations that the Chairman of the Federal Reserve uses to regulate the supply of money in the United States in the U.S economy. Short-term interest rates were relatively stable during the first half of the funds’ fiscal year. Toward the middle of the second half, however, short-term rates started to move down a little bit when concerns about the strength of the housing and credit market and the current economy led the Federal Reserve to reduce short-term rates. The Federal Reserve cut the federal funds rate by 25 basis points (0.25%) and pumped $41 billion of short-term reserves into the markets. On the daily basis, most businesses operate regardless of the Federal rate and completely independent of it. Coca-cola sells Coke by the truckload regardless of the trickle-down effect of the Federal Funds Rare. In addition, it generated gobs of excess cash that allowed it to service virtually and interest rate the banks threw at it. The Coca-cola company reports that the earnings per share of $1.77 for the year, versus $1.23 in the prior year. In addition, cash from operations has increased 15% to 5.5 billion. In addition, the fourth quarter earnings per share of $0.38 and the worldwide unit case volume growth of 3% in the fourth quarter and 4% for the full year. Opinions on if the Federal Reserve will raise interest rates in the future abound, with conventional wisdom siding with a rate increase. However, the decision probably will not affect what happens to stock prices as much as it would with news of corporate earnings surprises. With the benchmark lending rate at 1.5%, rates are still quite low – past economic recoveries have seen rates at 3% or higher at this stage. Unless the Federal does something strange, the interest rate decision is not likely to be a market mover and investors will have to look elsewhere for guidance. Coca-Cola, the Dow component, precipitated last week sell-off with its negative outlook. The company low its expected full-year tax rate to 22% from 22.5%, providing a 1 cent-per-share benefit in the quarter.

The Buying and Selling of Bonds

One of the main three useful tools in monetary policy is Open Market Operations (OMO) where the Fed buys and sells the Treasury bonds from the banks. When the Fed buys a Treasury bond from a bank or lends money to the bank, it increases the total of bank reserves, there by increasing the monetary base. When the Fed sells a Treasury bond to the bank, the banks pays the Fed by allowing the Fed to debit its reserve account, thereby decreasing the total bank reserves and monetary base. Two basic types of open market operations exist: Dynamic OMO and Defensive OMO. (http://www.oswego.edu)

How do open market operations affect Coca Cola’s business operations? One of the factors that Coca Cola benefits from with OMO is on the prices. In a competitive economic environment, product prices need to be reviewed often and validated in order to keep up with competition. The supply chain operations improvements in Coca Cola should help lower prices by reducing production volatility, inventory levels, and logistic costs. (http://www.businessbookmall.com)

Operating and executing in all levels from marketing and operations at the proper expectations and forecasts help to reduce production volatility, inventory levels, and logistic costs at Coca Cola. (http://www.businessbookmall.com)

Other improvement from streamlined supply chain operations is the growth of Coca Cola productivity, measured as output per hour or efficiency. The better of the efficiency is the less cost to the product and consequently is more revenue for Coca Cola.

Reserve Ratio Requirement

The