Presentation is loading. Please wait.

Presentation is loading. Please wait.

Monetary Policy.

Similar presentations

Presentation on theme: "Monetary Policy."— Presentation transcript:

1 Monetary Policy

2 Role of the Federal Reserve
Est. by President Wilson in 1913 Supervises member banks Holds Cash Reserves funds available for short-term borrowing by commercial banks or government guarantees that money is available in the economy when needed Moves money into and out of circulation

3 Characteristics of the Federal Reserve (independent of elected officials)
Lack of a Single Central Bank most countries have single central bank Fed relies on district banks to carry out national policies Ownership and Control by the Member Banks in countries with a central bank gov’t owns all shares of stock, allowing tight control member banks own stock in Fed; resulting in political independence Optional membership in the Fed for some banks nationally chartered banks must be members; state chartered banks are optional less than 40% of banks nationally are Fed members; 5800 Member Banks

4 Organization of the Fed
Board of Governors (another mechanism for independence) highest policy making body in Fed regulating money supply 7 member board appointed by President; serve 14 years; new appointment every 2 years; each serves 4 year terms 7 members and Chairman (Ben Bernanke) are permanent members of the Federal Open Market Commission Federal Open Market Commission—12 member committee; decides whether to buy or sell gov’t securities Board of Governors plus 4 district bank presidents that rotate Federal Reserve Banks—1913, 12 F.R. district banks that deal only with government and financial institutions that serve a designated geographic region 25 branch offices Member Banks 2750 national member banks 1000 state member banks

5 Organization of the Federal Reserve

6 Federal Reserve District Banks


8 Services to Banks: 12 district banks don’t have checking, savings accounts; they service member banks Clearing Checks Americans write 40 billions checks a year Fed tracks this by crediting and debiting reserve accounts Loans to Banks we get loans from banks; banks get loans from Fed banks need loans to cover increased withdrawals or loans most are short-term to cover immediate problem farm loans, natural disasters, financial emergencies participating banks face strict monitoring and scrutiny

9 Services to Government
Dept. of Treasury is Gov’t banker; collect taxes through IRS and Customs; produces money with U.S. Mint; Fed is gov’t bank Serving as the Government’s Bank serves as depository for federal revenues; deposited by Treasurer holds a Treasury checking account records the deposits and withdrawals of federal funds advises Congress and President on economic policy Supervising member banks “banking systems watchdog” monitors loans and investments and reviews bank records of reserves regulates bank mergers Regulating the Money Supply—amount of money circulating in the economy Dollars—printed by Bureau of Engraving and Printing Coins—printed by U.S. Mint Fed distributes currency Currency is put into distribution for 2 reasons: replace old and worn out notes increase amount of money in circulation by buying or selling government securities (T-bills and bonds)

10 Money Supply: Economists way to measure the nation’s money supply
M1—easiest way to measure only easily accessible counts all currency in circulation + travelers checks + checking account deposits checking accounts are 63% of M1 M2—a broader measure used by those who feel M1 doesn’t measure all accessible money Counts M1 + mutual funds + savings deposits + time deposits < $100, 000 M3 and L—both are broader measures than M2 M3 counts M2 + large time deposits L counts M3 + savings bonds + short term T-Bills + any other Near money

11 Questions Who is the current Chairman of the Federal Reserve?
What are the three roles of the Federal Reserve? The Federal Reserve is broken into 4 levels of organization. What are the four levels, and what is the role of each? What services does the Fed offer to member banks? What services does the Fed provide the federal government? What events led to the creation of the Federal Reserve System? How is the Federal Reserve System designed to be largely independent of the federal government? Why would this separation from elected representatives be desirable? How would Fed policy change if Mr. Bernanke were an elected official instead of appointed? What services does the Fed provide to banks? How does the Fed serve the government? What are the four different measurements of the U.S. money supply? Which funds are included in each measurement?

12 Monetary Policy Monetary Policy—plan to expand or contract the money supply in order to influence the cost and availability of credit done by regulating money supply and interest rates; Policy is based on the Federal Reserve measures of the money supply and Aggregate Demand Policy is enacted by the Federal Reserve

13 Monetary Policy: Strategies
Easy-Money Policy—designed to expand money supply, increase aggregate demand, reduce unemployment, and promote economic growth during recessions Charges banks lower interest rates, encourages borrowing (spending) Fed can expand money supply by buying securities Tight-Money Policy—Slows business activity and helps stabilize prices to reduce aggregate demand Results from inflation when too much money is circulating and credit is too easily accessible Fed can raise interest rates to make credit less accessible Fed can decrease the money supply by selling securities

14 Monetary Policy: Tools—ways to affect aggregate demand
Open-Market Operations—buying and selling of securities To contract money supply Fed sells government securities. Cash paid for securities is withdrawn from bank reserves, shrinking money supply and decreasing aggregate demand To expand money supply Fed buys government securities. Money makes it way into individual and business accounts increasing cash reserves and loan pools. This increases aggregate demand which leads to an increase in production Discount Rate—interest rate that the Fed charges member banks for the use of its reserves. a lower interest rate encourages banks to borrow more for their reserves. They then loan this to businesses and consumers to spend, increasing aggregate demand increasing interest rates discourages banks from borrowing. Banks will pass this increased interest onto businesses and consumers by raising the prime rate, ultimately decreasing the amount of loans that are made, decreasing aggregate demand. prime rate—interest rates banks charge on loans to their most reliable business customers law of demand—as price to borrow money increases (prime rate) demand decreases; as price decreases demand increases

15 Monetary Policy: Tools—ways to affect aggregate demand
Reserve requirements—changes affect lending capacity of banks increase reserve requirement—less money available for loans decrease reserve requirement—more money available for loans “Moral Suasion”—attempts by the Federal Reserve to put pressure on the member banks either to increase or decrease all or certain kinds of loans. Takes form of news releases, letters of appeal, Congressional testimony and conferences.

16 Summary of Monetary Policy Tools
Formal Tool Fed Action Effects on Economy Money Supply Open Market Securities Buys gov’t securities Bank reserves increase; aggregate demand & production increases Expands Sells gov’t securities Bank reserves shrink; aggregate demand decreases Contracts Discount Rate Lowers discount rate Encourages banks to borrow from the Fed; bank reserves increase Raises discount rate Discourages banks to borrow from Fed; bank reserves decrease Reserve Requirement Lowers the reserve requirement % Banks hold fewer reserves & extend more loans; interest rates fall; Aggregate demand increases Raises the reserve requirement % Banks hold more reserves & extend fewer loans; interest rates rise; Aggregate demand decreases contracts

17 Challenges to Monetary Policy
Economic Forecasting U.S. economy has millions of economic actors buying, selling, producing Forecast can be difficult, and if incorrect could harm economy Time Lags collection and analysis of economic data discussion and debate to reach consensus on data consumers/ producers need time to adjust their economic activity Priorities and Trade-offs easy-money policy fights recession, but increases inflation tight-money policy fights inflation, but contributes to recession Lack of Coordination sometimes Monetary Policy will conflict with Fiscal Policy Conflicting Opinions economics is not an exact science and can be influenced by personal economic philosophies of conservative v. liberal

18 Questions! How does Monetary Policy affect investment spending in factories and equipment? The housing market? Consumer spending? Who enacts Monetary Policy? Why is Monetary Policy easier to enact than Fiscal Policy during periods of inflation? What are the tools of Monetary Policy? What Monetary Policy should be enacted during a recession? Inflation? What are some challenges to enacting Monetary Policy? Considering our current economic situation, would you expect the Fed to enact easy money or tight money policies?

Download ppt "Monetary Policy."

Similar presentations

Ads by Google