1. Monetary Policy

2. The actions that the Federal Reserve System takes to influence the level of real GDP and the rate of inflation in the economy.
Purpose

3. What is the Federal Reserve System?
A privately owned system of 12 member banks that is publically controlled by the federal government.
The federal government does not own any stock in the Fed, but it appoints its leaders and makes laws to regulate it.
What is the Federal Reserve System?

4. 7 Governors appointed by the President for 14 year terms under advice and consent from the Senate.
Chairman of the Fed: President appoints one of the Governors to a renewable 4 year term
Chairman
of the Fed
Structure of the Fed

5. Chicago
Atlanta
Cleveland
Minneapolis
Richmond
San Francisco
Dallas
Kansas City
Philadelphia
St. Louis
Boston
New York City
12 District Banks Monitors and reports on economic conditions in their district. Oversees member banks.

6. All nationally chartered banks are required to join the Fed
Approximately 2600 member banks today
Member banks are the “stockholders” of the Fed
Member Banks

7. Functions of the Fed Serve Government
Maintain Treasury Department checking account
Sell, transfer, and redeem government securities
Issue currency
Serve Banks
Check clearing
Lender of last resort
Regulate Banks
Approve charters and proposed mergers
Enforce truth-in-lending laws
Sets reserve requirements
Conducts bank examinations
Regulate Money Supply
Monitors indicators of money supply
Adjusts the money supply to stabilize the economy
Functions of the Fed

8. Reserve Requirements – Banks are required to keep a certain percentage of their customers’ deposits. They loan out the rest. The Fed sets this percentage requirement.
Example: You deposit $100 in your bank account. The current reserve requirement is 10%. Your bank is required to keep $10 of your deposit on hand, but can lend out $90 to other members of your bank in car loans, home loans, etc…
Tools

9. Discount Rate / Federal Funds Rate – When banks need more money, they can borrow from each other at a certain interest rate (FFR), or in emergencies they can borrow from their district bank (DR). The Fed indirectly sets the FFR rate but directly sets the discount rate.
Tools

10. Tools Open Market Operations – This is the Fed’s most important tool
The buying and selling of government securities in order to change the money supply. The FOMC (Federal Open Market Committee) will order the Federal Reserve Bank of New York to either purchase or sell a certain quantity of government securities on the open market.
This is the Fed’s most important tool
Tools

11. Expansionary and Contactionary Policy
Expansionary Policy
(Easy Money )
Contractionary Policy
(Tight Money)
Reserve requirement
Discount rate
Open Market
Operations BUY
Reserve Requirement
Discount Rate
Open Market
Operations SELL
Expansionary and Contactionary Policy

12. Timing
Bad Timing – If timing of a policy change is bad, it could actually make the situation worse
Inside Lag – Takes time to recognize a problem…and then more time to enact the policy to fix it.
Outside Lag – Takes time for the policy to become effective
Predicting the Business Cycle – Monetary policymakers often don’t know how long a problem will last. So should they fix it (long term problem)....or let it fix itself (short term problem).
Limitations