In the Shoes of a Fed Policy-Maker Dawn Griffitts dawn.c.griffitts@stls.frb.org Federal Reserve Bank of St. Louis
Goals of Monetary Policy Price Stability Full Employment Stable Financial Markets
What is Monetary Policymaking? Responsibility for the U.S. money supply Achieved through specific policy tools Open Market Operations (most frequently used tool; targets the Federal Funds Rate) Discount Rate (changed in sync with OMO) Reserve Requirement (almost never changed)
Reserve Requirement The percentage of deposits at banks that must be held in vault cash or at the Fed. This $$$ cannot be loaned. Specific percentage is set by the FR Board (within limits set by law).
Discount Window Lending Rate is requested by regional Reserve Banks and approved by the Board of Governors Primary Credit is granted on a “no questions asked” basis at an interest rate of 100 basis points above the FOMC target for the federal funds rate. Secondary Credit is available to financial institutions that are not eligible for primary credit and the rate is 150 basis points above the FOMC target for the federal funds rate.
Open Market Operations and the Federal Funds Rate Depository institutions (DIs) may hold reserve balances ($$$ excess reserves) at Federal Reserve Banks. DIs can lend these reserves to one another in the federal funds market. Federal Funds Rate is the interest rate at which DIs borrow and lend federal funds overnight.
Open Market Operations and the Federal Funds Rate Open Market Operations by the Fed change bank reserves. Changes in bank reserves change the supply of loanable funds in that market and thus change the federal funds rate.
Open Market Operations and the Federal Funds Rate Open market purchases by the Fed (buying Treasury securities) increase reserves and lower the federal funds rate. Open market sales by the Fed (selling Treasury securities) decrease reserves and raise the federal funds rate.
Targeting the Federal Funds Rate To put downward pressure on the federal funds rate, the Fed buys treasury securities from banks’ portfolios. This purchase puts more “cash in the banks’ pockets” or increases bank funds available for consumers and businesses to borrow.
Purpose of Targeting the Federal Funds Rate A method for changing bank reserves (which are the funds banks have available to lend) When banks make loans, spending increases In the long-run, spending directly influences price levels (by changing demand for goods and services). In the short-run, spending levels may affect output and employment.
Who Makes Monetary Policy? The Federal Open Market Committee (FOMC) is composed of the Federal Reserve Board of Governors and the 12 regional Reserve Bank presidents.
Board of Governors Seven members Presidential appointment with senate approval 14-year, staggered terms Chairman appointment by president for 4-year term as chair
Reserve Bank Presidents Appointed by the Reserve Bank’s Board of Directors with approval from the Board of Governors All 12 Bank presidents provide input at FOMC meetings, but only 5 are voting members. Reserve Bank presidents rotate for 4 of the 5 votes; the president of FRB New York always votes.
Preparing for the FOMC Meeting Reserve Bank presidents are briefed on regional, national and international economic conditions by their Bank’s staff of research economists.
Beige Book
Behind Closed Doors Board staff report on economic conditions. Board of Governors and FRB presidents discuss their view of the economy. Board staff give monetary policy options (tighten, loosen or leave policy the same).
The Envelope Please . . . Board of Governors and 5 Bank presidents vote on policy decision. Federal Funds target is identified. FOMC agrees on the statement which will be released to the news media at the end of the meeting.
www.federalreserve.gov
FOMC Calendar
www.stlouisfed.org/education/ fedchallenge.html
Monetary Policy Framework
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How to Create Charts and Graphs
Ask an Economist
www. FederalReserveEducation www.FederalReserveEducation.org FED101—History, Structure, Monetary Policy
For More on Monetary Policymaking In Plain English: Making Sense of the Federal Reserve publication found at http://www.stls.frb.org/publications/pleng/default.html www.Federal ReserveEducation.org Click on FED101 and go to the Monetary Policy section. www.stlouisfed.org/education/fedchallenge.html