Monetary Policy

Monetary Policy Monetary Policy – the gov't ability to control the supply of money and Credit to stabilize the economy The Federal Reserve controls Monetary Policy

Federal Reserve System Structure 12 Reserve Banks Boston New York Philadelphia Cleveland Richmond Chicago St. Louis Kansas City Minneapolis San Francisco Dallas Atlanta 12 The Board of Governors in Washington, D.C. oversees the activities of the twelve independently operated District Reserve Banks across the country. Each of the 12 Federal Reserve Banks is separately incorporated with a Board of Directors. The District Federal Reserve Banks, along with their 25 branches, are located in major cities across the country, giving the System a strong grass-roots foundation. The Federal Open Market Committee (FOMC) is the chief policymaking body of the Federal Reserve System.

Federal Reserve (FED) The Federal Reserve is the central banking system for the United States If the commercial “baby” banks (Bank of America, Wachovia) need money they go to the Federal Reserve. Federal Reserve tells the baby banks what to do.

3 Tools used in Monetary Policy Discount Rate Reserve Requirement Open Market Securities (Bonds)

Reserve Requirement The amount of money that “baby” banks must keep in their vaults at the end of the day. This requirement is set by the FED. Usually around 10%. When money is deposited in a bank, the bank is allowed to lend or invest part of that deposit. But it must keep part of the deposit in "reserve."

Reserve Requirement Bank # New Deposits 10% Fractional Reserves Loans $1,000.00 $100.00 $900.00 2 $90.00 $810.00 3 $81.00 $729.00 4 $72.90 $656.10 5 $65.61 $590.49

Discount (Interest) rate The interest rate the Fed charges a commerical bank if it needs to borrow money to loan to customers. The “Fed” loans money to banks at an interest rate that the Fed decides.

Open Market Securities Bonds the “Fed” buys and sells The “Fed” can sell bonds to the baby banks or buy bonds from the baby banks

Monetary Policy Slow Grow Economy Economy (Inflation) (Recession) Increase Discount Rate Decrease Discount Rate Buy Securities Sell Securities Decrease Reserve Requirement Increase Reserve Requirement