Federal Reserve and Macroeconomic Policy Monetary Policy Federal Reserve and Macroeconomic Policy

History of the Fed Created by Congress in 1913 Nation’s Central Bank Response to bank failures and panics Main Job: Conduct monetary policy Regulate amount of money in economy Promote economic growth  Full Employment Limit inflation Other jobs Make and enforce rules for banks Financial services (ex. Check clearing)

Structure of the Fed Board of Governors: Run the Fed System 7 Governors, 14 year terms Chairman selected from board (Ben Bernanke) Appointed by President, confirmed by Senate Federal Open Market Committee (FOMC) Federal Reserve Banks (12)

Monetary Policy Conducted by FOMC Open Market Operations Affects Federal Funds Rate Buying and selling government securities (bonds) Buying securities Increases money supply banks have more money to lend lower interest rates consumers and businesses borrow and spend more fights unemployment and recessions Selling securities Decreased money supply fight inflation Current Fed Funds Rate = approximately 0 %

Other Monetary Policies Discount Rate changes Interest rate Fed charges banks to borrow money from the Fed Current Discount Rate = .75% Reserve Requirement changes % of deposits banks must hold 3% for banks with $10-$55 million 10% for banks with over $55 million

“Easy Money” Monetary Policy Fight Recessions, Unemployment Open Market Operations Buy government securities from banks Lower Fed Funds Rate Lower Discount Rate Lower Reserve Requirement

“Tight Money” Monetary Policy Fight Inflation Open Market Operations Sell government securities to banks Raise Fed Funds Rate Raise Discount Rate Raise Reserve Requirement