DO NOW Get notes handout and paddle Preview/Prep “Monetary Policy” Notes Subject: Economics Topic: Monetary Policy EQs: What is the role of the Federal Reserve in the US economy? What makes an economic policy monetary? What are the tools used to implement monetary policy?

I can describe monetary policy. Learning Target: I can describe monetary policy. I will show I understand by taking notes, analyzing quotes, and participating in an inflation activity.

Let’s see what Mr. Clifford has to say about Monetary Policy

Remember…the Origins of Economic Policies??? Before the depression, the government rarely intervened in the economy. laissez-faire economic policy Government doesn’t intervene—let market problems resolve themselves because gov’t intervention could have unintended consequences. Today - government officials use a combination of fiscal & monetary policy to keep the economy running smoothly.

The Federal Reserve The “Fed”—Established by Congress in 1913 Acts as the central bank of the United States

The Federal Reserve Has THREE jobs: Guide monetary policy Regulate & supervise banking Provide financial services to private banks, U.S. government & foreign governments

Janet Yellen Federal Reserve Chairman (of the Board of Governors)

Monetary Policy Monetarism— the use of monetary policy to expand and contract the money supply in an economy. Monetary policy uses the Federal Reserve’s power to regulate: - the money supply - interest rates

Economist Associated with Monetary Policy Economist Milton Friedman believed controlling the money supply was key to stabilizing the economy. Friedman said “FREE THE MONEY” to keep the economy stable.

Goals of Monetary Policy: Fight inflation Keep prices stable Economic stability Lower unemployment

Monitary Policy Tools Open market trading – buying and selling of government bonds (like IOUs) Buying bonds puts more money into the economy Selling bonds puts more money

Monitary Policy Tools Interest rates The Fed sets the rate that private banks pay to borrow money from them This sets the rate private banks charge borrowers/savers

Monitary Policy Tools Reserve requirements How much cash banks have to keep “on reserve” in their regional Federal Reserve Bank (Richmond Fed, etc.)

Types of MONETARY policy EASY-MONEY monetary policy To fight recession and help the economy grow, the Fed will: increases the money supply decreases interest rates

Easy-Money Example: In 2001-2003 the Fed lowered interest rates from 6 Easy-Money Example: In 2001-2003 the Fed lowered interest rates from 6.5%-1% to respond Dot-com bubble burst & 9/11 attacks

Types of MONETARY policy TIGHT-MONEY monetary policy When economy is growing too fast, to fight inflation, the Fed will: decreases the money supply increases interest rates

Tight-Money Example FOMC raised rates Tight-Money Example FOMC raised rates .25% in March 2017 to prevent inflation as the economy is now in recovery from the Great Recession FOMC Statement     March 15, 2017 The Federal Open Market Committee decided to raise the target range for the federal funds rate to 0.75 to 1.00 percent.

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