Federal Reserve Policies Kevin Scofield

Overview  Federal Open Market Committee  Goals of the Federal Monetary Policy  Tools of the Federal Monetary Policy  How Federal Monetary Policy Affects the U.S. Economy

Federal Open Market Committee  12 total members  Federal Reserve Act of 1913  Alan Greenspan, Chairman of the Board of Governors

Goals of the Federal Monetary Policy  Stability in the Price Level –Provides an environment that supports economic growth  High Employment –Existence of frictional unemployment –4% - 6% –Short run  Economic Growth –“Subjective” growth rate –Stabilize interest rates

Tools of the Federal Monetary Policy  Primary Tool –Open Market Operations  Secondary Tools –Discount Rate –Reserve Requirements

Types of Targets  Operating Targets –“Monetary and financial variables whose changes tend to bring about changes in intermediate targets.”  Intermediate Targets –“Intermediate Targets, which may include interest rates or monetary aggregates, are variables that have a reasonably reliable linkage with the variables, such as output or employment, that constitute the Fed’s goals or ultimate objectives.”

How the Federal Monetary Policy Affects the U.S. Economy  The major way it affects the U.S. economy is through policy-induced changes in real interest rates –Cost of Borrowing –Availability of Bank Loans –Wealth of Households