Federal Reserve

Central Bank of the United States Regulates financial institutions Oversees economic and monetary policies.

How is it structured 12 regional federal banks located around major cities of USA. Philly has one! All have leaders (board of governors)

FOMC The FOMC (they are in the Fed and set monetary policy) Made up by 12 folks (7 board of govs plus 5 others) They meet 8 times a year to look at certain metrics to determine what it can do to help out. Called The Beige Book

The Fed’s Responsibilities Runs day to day banking business of the U.S. Pay government bills, such as social security and Medicare.

Policymaker Try to balance flow of money in the economy

Lender If banks need money, they borrow it from the Fed. Discount Rate The interest the Fed charges the banks.

Regulator Fed interprets laws, and monitors business affairs and audits. Compliance of banking rules and quality of loans. Two main watched.

Controller Fed takes old money out of circulation and replaces it with new bills and coins.

Monetary Policy The Fed injects and withdraws money from the economy, to help regulate and KEEP INFLATION DOWN. Why do you think it is necessary to inject and withdraw capital?

HOW DOES ALL THIS WORK?

Why would the fed control rates? The fed controls interest rates by raising or lowering how much the interest they charge banks to borrow money. If the economy is moving too fast the fed will raise borrowing rates. – Why? If the economy is moving too slow the fed will lower borrowing rates. – Why?

CPI, Unemployment rate and others CPI – is our general measure of Inflation- very scary thing. Inflation measures the rate at which the cost of everyday goods are rising. Example. If the average cost of everyday goods cost $1 last year and now $2 this year – INFLATION! It HAS to be a measure of many, many products combined to MAKE SURE it is happening. – Why? The dollar is being deflated so the cost of goods are more. Why is this not good? What should happen to balance this? What can the fed do about this?

Other metrics used by the Fed PPI Producers Price index – what it costs producers to make things comparable to last month, year etc… What correlation can you make between CPI and PPI? Unemployment - the percentage of people out of work for 90 days or less. If unemployment is going up – what can the fed do? The Core – the fed takes out of CPI food, energy and such because they can fluctuate tremendously. They like the number to be at 2.0% for the core.

FOMC – why 2% The Federal Open Market Committee deems 2% to be safe. Well we can’t let it be zero, then as soon as something bad happened we would be in trouble immediately. So we try to keep it at 2% for a buffer – silly.

Quantitative Easing What happens when the fed gets to zero and the economy is still awful? (look above at title of this slide) The fed borrows money from SS or some other pool they control and inject it directly into the economy by buying bank bonds and such directly. This gives the banks money on hand to lend out. Method used by the Fed to try and stimulate the national economy. We are just ending QE3 2014

Federal Funds Rate Rate that banks charge other banks for overnight access to the balances in their Reserve Bank accounts. Changes in rate affect short-term rates.

Why would banks having more money available be important to the economy?

Fed Questions What happens if the fed drops the short term discount rate for lending? What happens when banks decide to not loan any money out? What happens when you get paid under the table? What happens when the cost of labor drops significantly? What happens when the cost of corn goes down? What happens when gas prices go up?

Why do you think increasing the discount rate will help the economy Why do you think increasing the discount rate will help the economy? Think of a situation where it would not help. In what ways does the GDP, CPI, and PPI effect the Fed, and its monetary policies? Why is it important for the Fed to control the amount of money within the economy? What would do much money in the economy cause? Do you think Fed policies are used to help turn big, or small gears of the economy? EXPLAIN

The Fed has recently issued a Quantitative Easing, what worries should they have about this? Do you think that this will be successful? Do you think that the Fed should be strict or loose with its regulation of business and the economy? Should the Fed allow for business to run its course or become involved?