1. SESSION 2 Financial & Monetary Policies
Money & Banking
SESSION 2
Financial & Monetary Policies By
Dr. Soha El Magawry

2. Financial & Monetary Policies
Session 2
Money & Banking
Financial & Monetary Policies
Financial policies refers to policies related to:
The regulation,
The supervision, and
The oversight of the financial and payment systems including market and institutions with the view to:
Promoting financial stability, market efficiency, client-asset, and consumer protection.

3. Financial & Monetary Policies
Session 2
Money & Banking
Monetary policy is how central banks manage liquidity to create economic growth.
Liquidity is how much there is in the money supply. That includes credit, cash, checks, and money market mutual funds.
The most important of these is credit. That includes loans, bonds, and mortgages.

4. Financial & Monetary Policies
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Money & Banking
Objectives of Monetary Policy
The primary objective of central banks is to manage inflation.
The second objective is to reduce unemployment, but only after they have controlled inflation.

5. Financial & Monetary Policies
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Money & Banking
The U.S. Federal Reserve, like many other central banks, has specific targets for these objectives. It seeks an unemployment rate below 6.5%. The Fed said the natural rate of unemployment is between is between 4.7% and 5.8%. It wants the core inflation rate to be between 2.0% and 2.5%. It seeks healthy economic growth. That's a 2-3% increase in the annual Gross Domestic Product.

6. Financial & Monetary Policies
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Money & Banking
Types of Monetary Policy: Central banks reduce inflation by raising interest rates, selling securities through open market operations, and using its other tools. Contractionary Monetary Policy: They do the opposite to lower unemployment and avoid recession. They lower interest rates, buy securities from member banks, and use other tools to increase the liquidity. Expansionary Monetary Policy: Tools of Monetary Policy All central banks use at least three tools of monetary policy. Most have many more. They all work in an economy. This is done by managing banks' reserves.

7. Financial & Monetary Policies
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Money & Banking
The FED have five such major tools: First, it sets a reserve requirement, which tells banks how much of their money they must have on reserve each night. If it weren't for the reserve requirement, banks would lend 100% of the money you've deposited. Not everyone needs all their money each day, so it is safe for the banks to lend most of it out.

8. Financial & Monetary Policies
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Money & Banking
The FED have five such major tools (continued): Second, The Fed requires that banks keep 10% of deposits on reserve. That way, they have enough cash on hand to meet most demands for redemption. When the Fed wants to restrict liquidity, it raises the reserve requirement. The Fed only does this as last resort because it requires a lot of paperwork. It's much easier to manage banks' reserves using the Fed funds rate. This is the interest rate that banks charge each other to store their excess cash overnight. The target for this rate is set at the eight Federal Open Market Committee (FOMC) meetings. The Fed funds rate impacts all other interest rates, including bank loan rates and mortgage rates.

9. Financial & Monetary Policies
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Money & Banking
The FED have five such major tools (continued): The Fed's third tool is its discount rate. That's it charges banks to borrow funds from the Fed's fourth tool, the discount window. The Federal Open Market Committee (FOMC) usually sets the discount rate a percentage of a point higher than the Fed funds rate. That's because the Fed prefer banks to borrow from each other.

10. Financial & Monetary Policies
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Money & Banking
The FED have five such major tools (continued): The fourth tool, the Fed uses open market operations to buy and sell Treasuries and other securities from its member banks. This changes reserve amount that banks have on hand without changing the reserve requirement.

11. Financial & Monetary Policies
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Money & Banking
The FED have five such major tools (continued): The fifth tool, many central banks including the Fed use inflation targeting. It clearly sets expectations that they want some inflation. That's because people are more likely to buy now if they know prices are rising. In addition, the Fed created many new tools to deal with the Great Recession.

12. Financial & Monetary Policies
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Money & Banking
END of
SESSION 2