The Federal ReserveThe Federal ReserveChevalierChevalierSpring 2015Spring 2015

Warm-Up: Review Warm-Up: Review NotesNotes

To pursue an expansionary monetary policy, To pursue an expansionary monetary policy, what would the Fed do to the three tools of what would the Fed do to the three tools of monetary policy?monetary policy?

What is the Fed’s most important job?What is the Fed’s most important job?What type of monetary policy would the Fed What type of monetary policy would the Fed

pursue during a recession? Contractionary or pursue during a recession? Contractionary or expansionary?expansionary?

Which group of the Federal Reserve’s policy Which group of the Federal Reserve’s policy making body controls the money supply?making body controls the money supply?

The ease with which an asset can be The ease with which an asset can be converted into cash is called _________?converted into cash is called _________?

The money that banks must hold to secure The money that banks must hold to secure deposits is known as ____________?deposits is known as ____________?

The Federal Reserve Act was sign in what The Federal Reserve Act was sign in what year and by what president?year and by what president?

Janet YellenJanet Yellen

YellenYellen’’s Criticss Critics

Economic Philosophy:Economic Philosophy: KeynesianKeynesian Phillips CurvePhillips Curve

Inverse relationship between unemployment and Inverse relationship between unemployment and inflationinflation

Allowing inflation to rise could be a wise and Allowing inflation to rise could be a wise and humane policy if it increases outputhumane policy if it increases output

Each percentage point reduction in inflation Each percentage point reduction in inflation results in 4.4% loss in GDPresults in 4.4% loss in GDP

Structure of the FEDStructure of the FED Board of Governors- 7 members appointed by the Board of Governors- 7 members appointed by the

President and confirmed in the Senate with a SM President and confirmed in the Senate with a SM votevote They serve 14 year termsThey serve 14 year terms one appointment becomes vacant every two years one appointment becomes vacant every two years

for reasons of experiencefor reasons of experience

job is to supervise and regulate the FEDjob is to supervise and regulate the FED

Structure of the FEDStructure of the FED

FOMC- 7 members of the Board of governors FOMC- 7 members of the Board of governors and 5 presidents of member banksand 5 presidents of member banks

they decide monetary policythey decide monetary policy

12 FED Banks12 FED Banks

Check-ClearingCheck-Clearing

Monetary PolicyMonetary Policy

The expansion or contraction of the money The expansion or contraction of the money supply to influence the cost and availability of supply to influence the cost and availability of creditcredit In other words, how easy will money be In other words, how easy will money be

available?available? will fluctuate the availability of money based on will fluctuate the availability of money based on

economic factors (inflation, unemployment, economic factors (inflation, unemployment, GDP)GDP)

3 tools of monetary 3 tools of monetary policypolicy

Changing the discount rate- the rate at which Changing the discount rate- the rate at which the FED lends money to members banksthe FED lends money to members banks to raise it makes borrowing more expensive for to raise it makes borrowing more expensive for

banks and less likely for them to extend credit banks and less likely for them to extend credit (money supply contracts)(money supply contracts)

to lower it makes borrowing less expensive for to lower it makes borrowing less expensive for banks and more likely for them to extend credit banks and more likely for them to extend credit (money supply expands)(money supply expands)

3 tools of Monetary 3 tools of Monetary PolicyPolicy

Open Market Operations- the buying and Open Market Operations- the buying and selling of US Treasury bondsselling of US Treasury bonds when bonds are bought by the FED, checks when bonds are bought by the FED, checks

written by the FED add to reserves, expanding written by the FED add to reserves, expanding the money supplythe money supply

when bonds are sold by the FED, checks written when bonds are sold by the FED, checks written by buyers subtract from reserves, contracting by buyers subtract from reserves, contracting the money supplythe money supply

3 Tools of Monetary 3 Tools of Monetary SupplySupply

Reserve Requirement- The percentage of Reserve Requirement- The percentage of customer deposits a bank must hold as cash customer deposits a bank must hold as cash in reserve (in their vaults)in reserve (in their vaults) The FED can raise the R.R. (banks must hold a The FED can raise the R.R. (banks must hold a

larger percentage of deposits as cash, reducing larger percentage of deposits as cash, reducing available funds to lend out; this contracts the available funds to lend out; this contracts the money supply)money supply)

3 Tools of Monetary 3 Tools of Monetary PolicyPolicy

The Fed can lower the R.R. (banks can hold a The Fed can lower the R.R. (banks can hold a smaller percentage of customer deposits smaller percentage of customer deposits

to find out total amount of money created to find out total amount of money created with a single deposit, the equation iswith a single deposit, the equation is deposit amount/R.R.deposit amount/R.R.

Easy Money vs. Tight Easy Money vs. Tight Money PolicyMoney Policy

Easy money policy is the expansion of the Easy money policy is the expansion of the money supply by making credit less money supply by making credit less expensive to obtainexpensive to obtain

Tight money policy is the contraction of the Tight money policy is the contraction of the money supply by making credit more money supply by making credit more expensive to obtainexpensive to obtain

Other Monetary Policy Other Monetary Policy ToolsTools

Moral suasion- communication between Moral suasion- communication between banks, the government, and citizensbanks, the government, and citizens

Selective Credit controls- rules on who can Selective Credit controls- rules on who can borrow moneyborrow money