1. Fed Reading

2. Tools of Monetary Policy
Discount Rate & Open Market Operations

3. 3-Tools of Monetary Policy
The Fed has 3-tools to implement monetary policy:
reserve requirement (currently 10.0%)
discount rate (currently 0.75%)
open-market operations (currently 0.00% target)
alters the Federal Funds Rate

4. Changing Money Supply
Changing the discount rate & reserve requirement will increase or decrease Money Supply
Discount Rate &
Reserve Requirement
Money
Supply
Discount Rate &
Reserve Requirement
Money
Supply

5. Open-Market Operations
What: The primary way the Fed changes money supply
How: A process which involves the Fed buying & selling U.S. Government bonds
Bonds are also known as gov’t securities
Result: the “open-market” process alters the Federal Funds Rate
a free market short term interest rate where banks lend to other banks
Price determined by supply & demand

6. Open-Market Operations “in action”
To increase money supply:
the Fed buys government bonds (securities) from public
To decrease money supply:
the Fed sells government bonds (securities) to public
Gov’t bonds
Federal Reserve
Public
Market
Money

7. Federal Funds Market what: a very important short term interest rate
Affects loans for: cars, houses, credit cards, business, etc…..
6.0%
1.0%
5.25%
Currently
0.0%

9. Bernanke Interview Part II

10. Discount Rate
Discount rate: the interest rate the Fed charges banks for loans
The Fed sets this interest rate
NOT a “free market” interest rate (price not determined by supply/demand)
Special rate only for Banks to borrow
Fed discourages use of the “discount window”
In the past not a big part of monetary policy (in very important!)
The Fed is the “lender of last resort” in emergencies