1. Monetary Policy

2. Monetary Policy
Monetary Policy – the gov't ability to control the supply of money and Credit to stabilize the economy
The Federal Reserve controls Monetary Policy

3. Federal Reserve System Structure
12 Reserve Banks
Boston
New York
Philadelphia
Cleveland
Richmond
Chicago
St. Louis
Kansas City
Minneapolis
San Francisco
Dallas
Atlanta 12
The Board of Governors in Washington, D.C. oversees the activities of the twelve independently operated District Reserve Banks across the country.
Each of the 12 Federal Reserve Banks is separately incorporated with a Board of Directors. The District Federal Reserve Banks, along with their 25 branches, are located in major cities across the country, giving the System a strong grass-roots foundation.
The Federal Open Market Committee (FOMC) is the chief policymaking body of the Federal Reserve System.

4. Federal Reserve (FED)
The Federal Reserve is the central banking system for the United States
If the commercial “baby” banks (Bank of America, Wachovia) need money they go to the Federal Reserve.
Federal Reserve tells the baby banks what to do.

5. 3 Tools used in Monetary Policy
Discount Rate
Reserve Requirement
Open Market Securities (Bonds)

6. Reserve Requirement
The amount of money that “baby” banks must keep in their vaults at the end of the day.
This requirement is set by the FED. Usually around 10%.
When money is deposited in a bank, the bank is allowed to lend or invest part of that deposit. But it must keep part of the deposit in "reserve."

7. Reserve Requirement Bank # New Deposits 10% Fractional Reserves Loans
$1,000.00
$100.00
$900.00 2
$90.00
$810.00 3
$81.00
$729.00 4
$72.90
$656.10 5
$65.61
$590.49

8. Discount (Interest) rate
The interest rate the Fed charges a commerical bank if it needs to borrow money to loan to customers.
The “Fed” loans money to banks at an interest rate that the Fed decides.

9. Open Market Securities
Bonds the “Fed” buys and sells
The “Fed” can sell bonds to the baby banks or
buy bonds from the baby banks

10. Monetary Policy Slow Grow Economy Economy (Inflation) (Recession)
Increase Discount Rate
Decrease Discount Rate
Buy
Securities
Sell
Securities
Decrease Reserve Requirement
Increase Reserve Requirement