The Federal Reserve Monetary Policy: Goals & Challenges

Reading: What is the Federal Reserve Ben Bernanke Chairman Janet Yellen Chairperson Feb ?

The Federal Reserve Central Bank of the United States –Independent from Government 2 Primary goals: –#1- Maximum Output (GDP) & Employment –#2- Stable Prices (low inflation) Federal Reserve’s regulates the Money Supply –This is how they change short term interest rates (federal funds rate) Janet Yellen

2 Conflicting Fed Goals Goal #1 Maximum output & employment ( High GDP & Low Unemployment ) Goal #2 Stable Prices (low inflation) What makes these 2-Goals in direct conflict? Try to help Goal #1: High GDP & Low Unemployment => lower interest rates ↓ interest rates => AD ↑=> Real GDP ↑ but Price level ↑ (hurts Goal #2) AD 2

MONEY Money- anything used to facilitate the exchange of goods & services between buyers and sellers

2 Kinds of Money Commodity money takes the form of a commodity with intrinsic value –Examples: Gold, silver, cigarettes Fiat money is used because of Government decree –It does not have intrinsic value –Examples : Coins, currency, check deposits –U.S. money was backed by gold until 1971

Money Supply Total amount of money in circulation U.S. uses fiat currency Federal Reserve “controls” size of the money supply –The Fed can “print” or create money (Janet Yellen) The President can only create Gov’t debt –President Obama sells bonds to produce Gov’t Debt

Money Supply & Interest Rates Changing the money supply directly affects short term interest rates –Currently at 0.0% Rapidly ↑ Money Supply leads to high inflation

Federal Reserve in action

Federal Open Market Committee (FOMC) Main policy-making part of Federal Reserve (12 members) –Meets 8-times to vote on Monetary Policy –Their job is to regulate the money supply –Adjust short term interest rates

Bernanke Interview

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