1. The Federal Reserve Chevalier Spring 2015

2. Warm-Up: Review Notes To pursue an expansionary monetary policy, what would the Fed do to the three tools of monetary policy? To pursue an expansionary monetary policy, what would the Fed do to the three tools of monetary policy? What is the Fed’s most important job? What is the Fed’s most important job? What type of monetary policy would the Fed pursue during a recession? Contractionary or expansionary? What type of monetary policy would the Fed pursue during a recession? Contractionary or expansionary? Which group of the Federal Reserve’s policy making body controls the money supply? Which group of the Federal Reserve’s policy making body controls the money supply?

3. The ease with which an asset can be converted into cash is called _________? The ease with which an asset can be converted into cash is called _________? The money that banks must hold to secure deposits is known as ____________? The money that banks must hold to secure deposits is known as ____________? The Federal Reserve Act was sign in what year and by what president? The Federal Reserve Act was sign in what year and by what president?

4. Janet Yellen

5. Yellen’s Critics Economic Philosophy: Economic Philosophy: Keynesian Keynesian Phillips Curve Phillips Curve Inverse relationship between unemployment and inflation Inverse relationship between unemployment and inflation Allowing inflation to rise could be a wise and humane policy if it increases output Allowing inflation to rise could be a wise and humane policy if it increases output Each percentage point reduction in inflation results in 4.4% loss in GDP Each percentage point reduction in inflation results in 4.4% loss in GDP

8. Structure of the FED Board of Governors- 7 members appointed by the President and confirmed in the Senate with a SM vote Board of Governors- 7 members appointed by the President and confirmed in the Senate with a SM vote They serve 14 year terms They serve 14 year terms one appointment becomes vacant every two years for reasons of experience one appointment becomes vacant every two years for reasons of experience job is to supervise and regulate the FED job is to supervise and regulate the FED

9. Structure of the FED FOMC- 7 members of the Board of governors and 5 presidents of member banks FOMC- 7 members of the Board of governors and 5 presidents of member banks they decide monetary policy they decide monetary policy

10. 12 FED Banks

11. Check-Clearing

12. Monetary Policy The expansion or contraction of the money supply to influence the cost and availability of credit The expansion or contraction of the money supply to influence the cost and availability of credit In other words, how easy will money be available? In other words, how easy will money be available? will fluctuate the availability of money based on economic factors (inflation, unemployment, GDP) will fluctuate the availability of money based on economic factors (inflation, unemployment, GDP)

13. 3 tools of monetary policy Changing the discount rate- the rate at which the FED lends money to members banks Changing the discount rate- the rate at which the FED lends money to members banks to raise it makes borrowing more expensive for banks and less likely for them to extend credit (money supply contracts) to raise it makes borrowing more expensive for banks and less likely for them to extend credit (money supply contracts) to lower it makes borrowing less expensive for banks and more likely for them to extend credit (money supply expands) to lower it makes borrowing less expensive for banks and more likely for them to extend credit (money supply expands)

14. 3 tools of Monetary Policy Open Market Operations- the buying and selling of US Treasury bonds Open Market Operations- the buying and selling of US Treasury bonds when bonds are bought by the FED, checks written by the FED add to reserves, expanding the money supply when bonds are bought by the FED, checks written by the FED add to reserves, expanding the money supply when bonds are sold by the FED, checks written by buyers subtract from reserves, contracting the money supply when bonds are sold by the FED, checks written by buyers subtract from reserves, contracting the money supply

15. 3 Tools of Monetary Supply Reserve Requirement- The percentage of customer deposits a bank must hold as cash in reserve (in their vaults) Reserve Requirement- The percentage of customer deposits a bank must hold as cash in reserve (in their vaults) The FED can raise the R.R. (banks must hold a larger percentage of deposits as cash, reducing available funds to lend out; this contracts the money supply) The FED can raise the R.R. (banks must hold a larger percentage of deposits as cash, reducing available funds to lend out; this contracts the money supply)

16. 3 Tools of Monetary Policy The Fed can lower the R.R. (banks can hold a smaller percentage of customer deposits The Fed can lower the R.R. (banks can hold a smaller percentage of customer deposits to find out total amount of money created with a single deposit, the equation is to find out total amount of money created with a single deposit, the equation is deposit amount/R.R. deposit amount/R.R.

17. Easy Money vs. Tight Money Policy Easy money policy is the expansion of the money supply by making credit less expensive to obtain Easy money policy is the expansion of the money supply by making credit less expensive to obtain Tight money policy is the contraction of the money supply by making credit more expensive to obtain Tight money policy is the contraction of the money supply by making credit more expensive to obtain

18. Other Monetary Policy Tools Moral suasion- communication between banks, the government, and citizens Moral suasion- communication between banks, the government, and citizens Selective Credit controls- rules on who can borrow money Selective Credit controls- rules on who can borrow money