Transcript The Federal Reserve

The Federal Reserve
Chevalier
Spring 2015
Warm-Up: Review Notes
 To pursue an expansionary monetary policy, what
would the Fed do to the three tools of monetary
policy?
 What is the Fed’s most important job?
 What type of monetary policy would the Fed
pursue during a recession? Contractionary or
expansionary?
 Which group of the Federal Reserve’s policy making
body controls the money supply?
 The ease with which an asset can be converted into
cash is called _________?
 The money that banks must hold to secure deposits
is known as ____________?
 The Federal Reserve Act was sign in what year and
by what president?
Janet Yellen
Yellen’s Critics
 Economic Philosophy:
 Keynesian
 Phillips Curve
 Inverse relationship between unemployment and
inflation
 Allowing inflation to rise could be a wise and humane
policy if it increases output
 Each percentage point reduction in inflation results in
4.4% loss in GDP
Structure of the FED
 Board of Governors- 7 members appointed by the
President and confirmed in the Senate with a SM vote
 They serve 14 year terms
 one appointment becomes vacant every two years for
reasons of experience
 job is to supervise and regulate the FED
Structure of the FED
 FOMC- 7 members of the Board of governors and 5
presidents of member banks
 they decide monetary policy
12 FED Banks
Check-Clearing
Monetary Policy
 The expansion or contraction of the money supply
to influence the cost and availability of credit
 In other words, how easy will money be available?
 will fluctuate the availability of money based on
economic factors (inflation, unemployment, GDP)
3 tools of monetary policy
 Changing the discount rate- the rate at which the
FED lends money to members banks
 to raise it makes borrowing more expensive for banks
and less likely for them to extend credit (money
supply contracts)
 to lower it makes borrowing less expensive for banks
and more likely for them to extend credit (money
supply expands)
3 tools of Monetary Policy
 Open Market Operations- the buying and selling of
US Treasury bonds
 when bonds are bought by the FED, checks written by
the FED add to reserves, expanding the money supply
 when bonds are sold by the FED, checks written by
buyers subtract from reserves, contracting the money
supply
3 Tools of Monetary
Supply
 Reserve Requirement- The percentage of customer
deposits a bank must hold as cash in reserve (in
their vaults)
 The FED can raise the R.R. (banks must hold a larger
percentage of deposits as cash, reducing available
funds to lend out; this contracts the money supply)
3 Tools of Monetary Policy
 The Fed can lower the R.R. (banks can hold a
smaller percentage of customer deposits
 to find out total amount of money created with a
single deposit, the equation is
 deposit amount/R.R.
Easy Money vs. Tight
Money Policy
 Easy money policy is the expansion of the money
supply by making credit less expensive to obtain
 Tight money policy is the contraction of the money
supply by making credit more expensive to obtain
Other Monetary Policy
Tools
 Moral suasion- communication between banks, the
government, and citizens
 Selective Credit controls- rules on who can borrow
money