Before the Federal Reserve was founded, the nation was plagued with financial crises. At times, these crises led to “panics” in which people raced to their banks to withdraw their deposits. Banks needed a source of emergency reserves to prevent the panics and resulting bank runs from driving them out of business. A particularly severe panic in 1907 resulted in bank runs that wreaked havoc on the fragile banking system and ultimately led Congress in 1913 to write the Federal Reserve Act. The Federal Reserve System, initially created to address these banking panics, is now charged with several broader responsibilities, including fostering a sound banking system and a healthy economy.

Conducting Monetary Policy Keeping our economy healthy is one of the most important jobs of the Federal Reserve. The Federal Reserve System has been given a dual mandate—pursuing the economic goals of price stability and maximum employment. It does this by managing the nation’s system of money and credit—in other words, conducting monetary policy.

price stability means that the economy is not experiencing high inflation or deflation Experience has shown that the economy performs well when inflation is low and expected to remain low and predictable

Maximum Employment is just what it sounds like – we have the most people working we can! Low interest rates allow businesses to borrow money for expansion and hiring additional workers. Such an environment promotes low unemployment and allows the economy to achieve its growth potential Free from the disruptive effects of high and variable inflation, consumers and producers make economic decisions with confidence.

One way the FED tries to maintain a balance between Price Stability and Low Unemployment by controlling interest rates Low interest rates lead to lots of investment – which lowers unemployment BUT – it tends to raise prices (inflation) because there is a lot more money floating around in the economy!

Quiz! What organization was created to control monetary policy and ensure a stable economy in the United States? The Federal Reserve (The FED) What are the two main goals of the Federal Reserve? Price Stability and Maximum Employment What is one of the most important tools the Fed uses to control the money supply? Controlling Interest Rates What would happen to the economy (unemployment and prices) if the FED raised interest rates tomorrow? People would stop borrowing and spending so much money so lower demand means prices would fall. However, business would also stop borrowing so they would not expand and will start to fire works so the unemployment rate would rise.

Your in Charge! Its your job to keep INFLATION low and stable (around 2%) add keep the Unemployment rate near normal (around 5%) Hint! If inflation is high, try raising the interest rate – this will slow spending and investing…. but what will that do to unemployment…? Click here to play!