Federal Reserve (Monetary Policy)

Monetary Policy Refers to what the Federal Reserve (nation’s central bank) does to influence the amount of money and credit in the U.S. economy. What happens to money and credit affects interest rates and the performance of our economy. “Decentralized-Central Bank”: Public: The Board of Governors of the Federal Reserve is a government agency Private: 12 Federal Reserve Banks are not government agencies “Banker’s Bank”

Goals of Monetary Policy In the 1800s, people routinely lost faith in the banking and the financial system (paper money could be printed by states, cities, and private businesses). NOT all customer deposits are in the banks “vault”--> lent out to other customers “FED” established in 1913: create a safer and more stable monetary and banking system. President: Woodrow Wilson Goal: Promote sustainable economic growth, full employment, and stable prices. Clip #1

3 Tools of Monetary Policy Open Market Operations Reserve Requirement Discount Policy PRIMARY TOOL Controlled by FOMC Buying and selling of U.S. government securities, which changes money supply. In turn INTEREST RATES are affected. Encourage people to spend $ = lowering IR Encouraging people to save $ = increasing IR Portions/Percentage of deposits that banks must maintain either in reserves. Ex: 1992 reserve lowered from 12% --> 10% Required banks to keep less $ in reserves --> allowing greater lending = More in hands of Public (increase spending) Opposite effect if there is an increase. Interest rate charged by Federal Reserve Banks to depository institutions (banks) on short-term loans. Lower Interest Rates encourages borrowing High Interest Rates discourages borrowing