Download The Federal Reserve

Personal Finance
Scott Wentland
[email protected]
434-395-2160
Longwood University
201 High Street
Farmville, VA 23901
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Finally, money…
• The government also plays another important
role: it is in charge of money
• Money is anything that is widely accepted as a
means of payment.
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Currency: Paper bills and coins.
Bank reserves held by banks at the Fed.
Checkable deposits: your checking or debit account.
Savings deposits, money market mutual funds, and
small-time deposits.
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The 2 Kinds of Money
Commodity money:
takes the form of a commodity
with intrinsic value
Examples: gold coins, cigarettes
in POW camps
Fiat money:
money without intrinsic value,
used as money because of
govt decree
Example: the U.S. dollar
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THE MONETARY SYSTEM
3
The U.S. Money Supplies
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Federal Reserve
• Who is in charge of money in the US?
• The Federal Reserve
– Central Bank of the United States, also called “the
Fed”
– Can issue and create money.
• Influence interest rates and engages in monetary policy
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Federal Reserve
• Is a bank with two customers.
– It is the government’s bank.
• Maintains the bank account of the U.S. Treasury.
• It manages government borrowing.
– Issuing, transferring, and redeeming of U.S. Treasury bonds, bill, and
notes.
– It is the banker’s bank.
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Banks keep their own accounts at the Fed.
Banks can borrow from the Fed.
• The Fed Also…
– Regulates other banks.
– Manages the nation’s payment system.
– Protects financial consumers with disclosure regulations.
• Most important function: Regulating the U.S. money
supply.
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Monetary Policy
• Three Major Tools the Fed Uses to Control the
Money Supply
1. Open market operations: buying and selling of U.S.
government bonds on the open market.
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Influences interest rates
2. Discount rate lending and the term auction facility:
Federal Reserve lending to banks and other financial
institutions.
3. Required reserves and payment of interest on
reserves: Changing the minimum RR; paying interest
on any reserves held by banks at the Fed.
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Monetary Policy
• Its tools determine how much money is
floating in the economy
– Raise the money supply
• Generally associated with lower interest rates
– Lower the money supply
• Generally associated with higher interest rates
• Controlling the money supply and influencing
interest rates is the key policy tool it uses to
help stabilize the economy
– More about this in Principles of Macroeconomics
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Monetary Policy
• Monetary policy is the primary controller of
inflation
– Inflation is an ↑ in the average level of prices.
– Usually measured by the CPI (Consumer Price
Index) and other indices
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Monetary Policy
• The Fed has an extraordinarily important job
– Oversee how much money is in the economy
– Stabilize the economy
– Control interest rates and inflation
– Regulates and oversees financial markets and the
entire banking system
• This is why you see it in the newspaper so
much
– When the Fed speaks, markets listen
– The world listens…
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Monetary Policy vs. Fiscal Policy
• Monetary policy
– Federal Reserve stabilizing the business cycle
• Mostly through money creation, interest rates, NGDP
• Fiscal policy
– Federal budget (Congress & the President)
stabilizing the business cycle
• Mostly through taxes & spending
• Both address issues with AD
• Pro’s and con’s
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Monetary Policy vs. Fiscal Policy
• Final thoughts:
– Macroeconomic policy is very difficult because the
economy is so complex
– Economists have just scratched the surface in
understanding the complexities of the economy
and market
– A little economics can go a long way
• But even economic experts must be humble about the
limits of our knowledge
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Thank You
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