1. Monetary Policy

2. Monetary Policy
A government policy that manages the economy by controlling the money supply and interest rates.

3. Structure of “The Fed” The Board of Governors
Over see the Federal Reserve System
Composed of seven members who appointed by the President for staggered 14 year terms
The President also appts the Chair of the Board of Governors and the Senate must confirm this position. The Chair serves a four year term that can be renewed.
Ben Bernanke

4. Structure of “The Fed” Twelve Federal Reserve Districts
One Federal Reserve Bank is located in each district
One Bank represents several states
Keeps one bank from exploiting others
Each bank monitors that regions economic conditions
Each bank has nine directors that represent the regions various interests
Three each: banks, regional industries, appointees by Board

5. Duties of “The Fed” Bank for the Treasury Department
Processes IRS refunds, issues Social Security checks, and other gov’t payments
Issues currency to banks
Serves as the financial agent for the Treasury Dept by buying and selling bonds, notes, and bills.

6. Duties of “The Fed” Financial Services for Banks: Check clearing
Supervises lending practices to ensure stability of banks by monitoring their reserves
Lender of Last Resort
Uses the “Discount Rate” for all emergency loans

7. Duties of “The Fed” Supervisory & Regulatory Functions:
Monitors the reserves each bank keeps on hand
Performs bank examinations and audits

8. Money Creation How is money entered into the banking system:
You get a loan from the bank and deposit that money into your account.
Ex) $1,000  $900  $810 …..
Required Reserve Ratio (RRR)
Usually about 10%

9. RRR
To calculate the amount of money that will be created use the money multiplier formula:
1/RRR =
If the RRR is 10% than 1/10
An initial deposit of $1000 = $10,000

10. RRR The Fed does not like to alter the RRR but…
If the RRR increases than the money supply decreases
If the RRR decreases than the money supply increases

11. The Discount Rate Lender of Last Resort:
The Fed can raise or lower the Discount Rate on emergency loans
This is the only interest rate The Fed can actually change…it “targets” the federal fund rates that banks charge each other by using Open Market Operations

12. Open Market Operations
The buying and selling of government bonds to alter the supply of money and thus effect interest rates and the economy

13. Purchasing Bonds
In order to increase the money supply the FOMC will purchase bonds on the open market
The Fed will purchase bonds with money/checks
The bond dealers give The Fed the bonds in exchange for the money
The bond dealers then deposit the money from the bond sales in to their banks
The banks now have more money and the interest rates fall and funds enter the economy

14. Selling Bonds
If the FOMC chooses to decrease the money suppy, it will make an open market bond sale.
The Fed now sells in bonds back to the dealers receiving from them checks drawn on their own banks.
The money goes back to The Fed and is now out of circulation.
There is now a decline in the money supply and interest rates climb

15. Lags in Policy Changes
Inside lags: The time it takes to decide on a policy change and implement the new policy
Outside lags: The time it takes for the monetary policy to have an effect as they effect business plans.