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The Federal Reserve
Monetary policy
Introduction
• The Federal Reserve is the central bank of the United
States whose unique structure includes the Board of
Governors, in Washington, D.C., a federal
government agency, together with 12 regional
Reserve Banks.
• It was initially created by the congress to stabilize the
country’s financial system. (Board of Governors of
the Federal Reserve System (U.S.), 1974).
Factors that influence the federal system
in adjusting discount rates
• The bankers bank: when depository
institutions pay interest on money they
borrow from the federal reserve, the interest
rate comes out as discount rates. As the
discount rate is passed on to us, loan
interest start fluctuating.
• Adjusting for inflation: when businesses rise
prices, the federal reserve tries raise the
discount rates so as to cut demand.
Cont’
• Adjusting for recession: after a recession,
the federal reserve try's to lower the
discount rate so as to avoid a depression. It
in turn encourages borrowing so that the
public can get back on its feet financially.
• Discount rate adjustments: fluctuations in
interest rates affects businesses profits
according to how the federal reserve adjusts
discount rates.
How the discount rate affects decisions
of banks in setting their specific interest
rates
• As the discount rates lower, the banks are
able to get loans from the federal reserve
and even loan out more to its customers.
Money supply in turn increases. (Board of
Governors of the Federal Reserve System
(U.S.), 1974).
How monetary policy aims to avoid
inflation
• Monetary policy influences the economy's
demand for goods and services as well as
inflation. As the federal reserve system
reduces interest rates, there is an increased
demand for goods and services which in turn
pushes wages and costs higher. It finally
shows demand for materials and workers
needed for more production. (Board of
Governors of the Federal Reserve System
(U.S.), 1974).
How monetary policy controls money
supply
• If the federal system buys back, already
issued securities, for instance, money supply,
from security dealers and large banks,
money supply is increased in the hands of
the public. However, money supply is
decreased when the federal reserve sells
securities. (Board of Governors of the
Federal Reserve System (U.S.), 1974).
How a stimulus program(through the
monetary multiplier) affects money
supply
• The money multiplier is constituted by the
additional amount of money generated by
every additional dollar reserved.
• Money multiplier can be then used to assess
and model money policy decisions. Money
movement can be restricted to move in the
economy by the monetary policies.
• Money moves faster when interest rates are
low.
Indicators evident that there’s too much
or too little money within the economy.
How monetary policy aims to adjust this.
• Inflation, monetary and fiscal policies are
good indicators. If inflation goes high, there
are greater injections than leakages.
• Monetary policy affects economy’s interest
rates. High interests encourage savings
rather than spending.
• When inflation goes high, interest rates are
raised to cut down consumption and hence
demand.
Differences between the federal reserve
and the Bank of Canada.
Bank of Canada is accountable to the minister
of finance( governmental policy control) while
the federal reserve system is accountable to no
one (no governmental policy control)
• The federal reserve operates on its own (on
private basis) which is the opposite of Bank
of Canada. (Board of Governors of the
Federal Reserve System (U.S.), 1974), (Bank
of Canada, 1971)
References
Board of Governors of the Federal Reserve System
(U.S.). (1974). The Federal Reserve System:
Purposes and functions. Washington, D.C: Board
of Governors.
Bank of Canada. (1971). Bank of Canada review.
(ProQuest 5000 International.) Ottawa: Bank of
Canada.