27 Module The Federal Reserve: Monetary Policy. What you will learn in this Module : The functions of the Federal Reserve System The major tools the Federal.

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Presentation transcript:

27 Module The Federal Reserve: Monetary Policy

What you will learn in this Module : The functions of the Federal Reserve System The major tools the Federal Reserve uses to serve its functions

Central Bank of U.S. Board of Governors 12 Federal Reserve Banks The Federal Reserve System

The Functions of the Federal Reserve System The Functions of the Federal Reserve System Provide Financial Services Supervise and Regulate Banking Institutions Maintain the Stability of the Financial System Conduct Monetary Policy

Reserve Requirement Discount Rate Open-Market Operations What the Fed Does

The Reserve Requirement The Reserve Requirement The required reserve ratio & reserve requirement Federal Funds Market (banks borrowing from banks if reserves fall below 10%) Federal Funds Rate (interest rate banks charge each other) Changes in the Reserve Requirement Not generally used as a tool of monetary policy (not done since 1992)

The Discount Rate The Discount Rate Discount Rate (interest rate Fed charges. 1% above Fed Funds Rate) Discount Rate Relative to Fed Funds Rate Secondary tool of monetary policy Reducing the spread between FFR and DR. Cost of borrowing reduces and banks can lend more

Open-Market Operations Open-Market Operations