Transcript Rating the Rates: The Fed's Role in the Larger Economy

Rating the Rates:
The Fed’s Role
in the Larger Economy
By Tanya Hanson and Tom Glaser
Federal Reserve Bank of Atlanta
Lesson Plan Contest of the Year Contest, 2007–2008
Second Place
Confused yet?
Part I
The Federal
Reserve System
What is the
Federal Reserve System?
 The Federal Reserve System
is the nation’s central bank.
What is the structure
of the Fed?

Board of Governors

12 regional Reserve Banks

The Federal Open Market Committee
(FOMC)
The Fed (continued)
 About 37% of all banks are member banks,
including most large banks.
 Reserve requirements established by the Federal
Reserve Board apply to nonmember depository
institutions and member banks.
 Both classes of institutions are given access to
Federal Reserve discount borrowing and Federal
Reserve services on an equal basis.
The functions of the Fed
 Supervising and regulating banks
 Providing financial services
 Conducting monetary policy
What is monetary policy?
 Federal Reserve actions to influence the
availability and cost of money and credit
as a means of helping to promote
maximum employment, stable prices,
and moderate long-term interest rates.
What is the FOMC?
 The Federal Open Market Committee
conducts monetary policy
 12 members
 8 scheduled meetings a year
What are the tools of
monetary policy?
 Open market operations
 Discount rate
 Reserve requirements
Open market operations
 Purchases and sales by the Fed of
government securities to influence the
volume of money and credit in the economy.
 Purchases foster expansion of money and
credit; sales have the opposite effect.
 Open market operations are the Federal
Reserve’s most important and most flexible
monetary policy tool.
Discount policy
 Specifies the interest rate at which eligible
depository institutions may borrow funds,
usually for short periods, directly from the
Federal Reserve Banks.
 The law requires the board of directors of each
Reserve Bank to establish the discount rate
every 14 days subject to the approval of the
Board of Governors in Washington.
Reserve requirements
 Reserves that must be held against customer
deposits by banks and other depository
institutions.
 The Board of Governors sets reserve
requirements within limits specified by law for all
depository institutions that have transaction
accounts or nonpersonal time deposits.
 A lower reserve requirement allows more
deposit and loan expansion, and a higher
reserve ratio permits less expansion.
What is the
federal funds rate?
 This is an overnight rate charged
by one depository institution to another
for short-term loans.
 The FOMC sets the “target federal
funds rate.”
Part II
Student Project
What are rates?
The diversity of rates can cause confusion
among consumers’ understanding of financial
markets and the overall economy.
This lesson will help students understand more
about the Fed and a variety of rates and how
the Fed is involved in those rates.
Categories of rates
 Consumer finance rates
 Economic indicator rates
 Monetary policy rates
 Fiscal policy rates
Consumer finance rates
These apply to the consumer transactions
of borrowing and saving money.
Examples of borrowing include
mortgage rates, car loan rates, and
college loan rates. In contrast, saving
includes CDs, IRAs, and bonds.
Economic indicator rates
Economic indicators, which are aggregates
or totals, measure the overall health and
stability of the economy.
Examples of these indicators include the
inflation rate and the unemployment rate.
Monetary policy rates
These rates are determined by the Fed.
The goal of monetary policy is to promote
maximum employment, stable prices, and
moderate long-term interest rates.
Fiscal policy rates
These rates are set by
Congress as it uses the
fiscal policy tools of
taxation and spending to
achieve macroeconomic
goals.
Research assignment
In this lesson, you will learn about many kinds
of rates and what each means and how each
rate is related to the Federal Reserve System.
You will research each term on your own or in
small groups and then report back to the entire
class. This sharing will help you develop a
greater appreciation of the complexity and
interrelatedness of the economy, and the role
of the Federal Reserve.
Assignment
1.
2.
3.
4.
Student research assignment
Student presentations
Student peer evaluations
Short essay: Based on your research and the
presentations, how do at least three of these
rates relate to each other?
Use correct terminology to describe how these
rates are determined and how they influence
each other and the economy.
Online resources
 Board of Governors of the Federal Reserve system publications.
http://www.federalreserve.gov/publications/default.htm
 The Federal Reserve Board. Research and history of the Federal
Reserve System. http://www.federalreserve.gov/
 The Federal Reserve Board Beige Book. A summary of current
economic conditions by the Federal Reserve.
http://www.federalreserve.gov/FOMC/BEIGEBOOK/2008/
 The Federal Reserve Bank of Minneapolis. Publications concerning
current economic conditions.
http://minneapolisfed.org/pubs/region/99-03/beige.cfm
 The Federal Reserve Bank of New York. Information about the
Federal Open Market Committee (FOMC) and monetary policy.
http://www.newyorkfed.org/aboutthefed/fedpoint/fed48.html
Online resources (continued)
 Federal Reserve Bank of San Francisco. Glossary of monetary
economic terms. http://www.frbsf.org/tools/glossary/
 U.S. Department of Treasury. Site for current economic policy and
domestic financial information. http://www.ustreas.gov/offices/
 The Free Dictionary. Glossary for financial economic terms.
http://www.thefreedictionary.com/
 The Money Café. Additional glossary for financial economic terms.
http://www.moneycafe.com/library/
 BNET: The Business Net. Search engine for business terms.
http://www.bnet.com/
 Investopedia. Search engine for financial terms.
http://www.investopedia.com/dictionary/default.asp
 Business Dictionary. A resource for business terms.
http://www.businessdictionary.com/
Publications online

In Plain English: Making Sense of the Federal Reserve.
Federal Reserve Bank of St. Louis. http://stlouisfed.org/education/resourcetools/

The Federal Reserve. Federal Reserve Bank of Dallas.

Banking Basics. Federal Reserve Bank of Boston.

Federal Reserve Structure and Functions. Federal Reserve Bank of Atlanta.

History of Central Banking. Federal Reserve Bank of Philadelphia

A Day in the Life of the FOMC. Federal Reserve Bank of Philadelphia.

How to Establish, Use, and Protect Credit.
Federal Reserve Bank of Philadelphia.

The Story of the Federal Reserve System.
Federal Reserve Bank of New York.

The Story of Inflation. Federal Reserve Bank of New York.

The Story of Monetary Policy. Federal Reserve Bank of New York.