Transcript The Federal Reserve

The Federal Reserve
How our Central Bank is structured
Critical Thinking
• How & Why is the Fed independent from Government?
How?
Why?
3 Primary Functions of Fed
• Regulates banks
– ensure banks follow laws
(housing bubble—what happened?)
• Acts as Banker’s Bank
– Makes emergency loans to banks => “lender of last resort”
– Discount rate: interest rate Fed charges banks (currently 0.75%)
• Conducts Monetary Policy
– regulates money supply to control short term interest rates
– Federal Funds Rate: interest rate Fed sets (currently 0.0%)
The Federal Reserve System
Federal Reserve Board (7-Governors in Washington)
12-District Banks
Ben Bernanke
Worked at Fed since 2002
Chairmen of Fed since 2006
(Term ends Jan. 2014)
Re-appointed for 2nd term 2009
Federal Open Market Committee
(FOMC)
• Main policy-making part of Federal Reserve (12 members)
– Meets 8-times per year to vote on Monetary Policy
↑ Money
Supply
=>
↓ Short term
interest rates
Federal Reserve in action 1999 - 2012
0.0%
2012
2 Primary Goals of Fed
What makes these 2-Goals in direct conflict?
Goal #1
Goal #2
Maximum output
& employment
Price
Level
Stable Prices
LRAS1
SRAS1
AD1
Real
GDP
Answer: High GDP & Low Unemployment can lead to inflation
i.e. solving goal #1 often will risk failing at goal #2
Video Interview #1:
Bernanke’s Plan: U.S. Economy
Price
Level
LRAS1
AD1
Real
GDP
SRAS1