1. The Fed
Monetary Policy

2. Standards
SSEMA2 The student will explain the role and functions of the Federal Reserve System.
Describe the organization of the Federal Reserve System.
Define monetary policy.
Describe how the Federal Reserve uses the tools of monetary policy to promote price stability, full employment, and economic growth.

3. Basic Facts Public Government’s bank
We go to Wells Fargo, congress goes to the Fed
Created by congress
Can be dissolved by congress
Fiscal agent for the U.S. Government
Currency = Federal Reserve note b/c backed by assets of Fed. Reserve
Profits = transferred to U.S. Government
2011 = $79 billion transferred to U.S. Government

4. Board of governors 7 members appointed by President
Confirmed by senate
14 yr terms
1 terms starts every 2 yrs, on Feb. 1 of even year
Public part of Federal Open Market Committee
FOMC = makes decisions about monetary policy
Chairman and Vice Chairman serve 4yr terms.

5. Basic Facts Private Decentralized w/12 banks for the whole country
Each Bank:
2/3 directors = elected by privately controlled member banks of that district
1/3 directors = elected by Board of Governors

7. Basic Facts Private 5 district bank presidents = voting member of FOMC
New York Fed. Reserve Bank Pres. = always a voting member FOMC
4 others rotate from other 11 districts
District banks
organized like private corporation
Self-financed through interest on securities or payment for services, i.e. check clearing

8. Basic Terms
Monetary Policy = tools used by the FOMC to stabilize economy
3 main tools of FOMC
Open Market Operations
Discount Rate
Reserve Requirement

9. Open Market Operations
Most common / most used tool of the Fed.
Buying and selling of government bonds on the open market. (meaning we can buy them)
Bought by banks and people
Backed by own money
Sell bonds to reduce money in circulation
Buy bonds to increase money in circulation

10. Open Market Operations
More we buy, less money in economy.
Less $ = no $ for loans
No $ for loans = interbank interest rate (Federal Funds Rate) goes up
Federal Funds rate goes up = less borrowing activity

11. Discount Rate The second most common tool of the Fed.
The interest The Fed charges banks to borrow money.
Prices go up (inflation) = raise discount rate
Prices go down (deflation) = lower discount rate
Used as signal to banks
Encourage/discourage banks to raise/lower federal funds rate
Increase/decrease loans to each other.

12. Reserve Requirement
How much of a customer’s deposit HAS TO BE put in the vault or reserve account at the Fed. Reserve.
This percentage CANNOT be used as loans.
Example:
I deposit $10k
Reserve requirement = 10%
Wells Fargo can only use $9k of that money to make loans for other customers

13. Reserve Requirement Least common tool Like hardly ever
Small changes = big differences in money supply
Raise requirement = pulls large amounts of money from economy
Lower requirement = increases large amounts of money into economy
Like actual money, not theoretical

14. Concerns of the Fed Inflation Unemployment/ economic growth
Uses tools to achieve their goals

15. Inflation/Price Stability
If Fed is concerned w/inflation or price stability =
Begin selling bonds on open market
Raise discount rate to signal banks to stop borrowing from each other
Goal is to remove $ from economy to lower prices

16. Unemployment Full employment =
All factors of production being used efficiently
Can refer to labor resources
meaning unemployment rate = structural + frictional w/ NO cyclical

17. Loose Monetary Policy Buy bonds which will
Decrease federal funds rate, which will
Encourage more borrowing
Sometimes = lower discount rate to signal banks to increase lending
Rarely = lower reserve rate to allow banks to use more $ out of their deposits