Download federal reserve

 Central Bank of the United States
 Regulates financial institutions
 Oversees economic and monetary policies.
 12 regional federal banks located around major cities
of USA.
 Philly has one!
 All have leaders (board of governors)
The FOMC (they are in the Fed and set monetary policy)
 Made up by 12 folks (7 board of govs plus 5 others)
 They meet 8 times a year to look at certain metrics to
determine what it can do to help out.
 Called The Beige Book
 Runs day to day banking business of the U.S.
 Pay government bills, such as social security and
Medicare.
 Try to balance flow of money in the economy
 If banks need money, they borrow it from the Fed.
 Discount Rate
 The interest the Fed charges the banks.
 Fed interprets laws, and monitors business affairs and
audits.
 Compliance of banking rules and quality of loans.
 Two main watched.
 Fed takes old money out of circulation and replaces it
with new bills and coins.
 The Fed injects and withdraws money from the
economy, to help regulate and KEEP INFLATION
DOWN.
 Why do you think it is necessary to inject and
withdraw capital?
HOW DOES
ALL THIS WORK?
 The fed controls interest rates by raising or lowering
how much the interest they charge banks to borrow
money.
 If the economy is moving too fast the fed will raise
borrowing rates. – Why?
 If the economy is moving too slow the fed will lower
borrowing rates. – Why?
 CPI – is our general measure of Inflation- very scary
thing.
 Inflation measures the rate at which the cost of everyday
goods are rising.
 Example. If the average cost of everyday goods cost $1 last year
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and now $2 this year – INFLATION!
It HAS to be a measure of many, many products combined to
MAKE SURE it is happening. – Why?
The dollar is being deflated so the cost of goods are more.
Why is this not good?
What should happen to balance this?
What can the fed do about this?
 PPI Producers Price index – what it costs producers
to make things comparable to last month, year etc…
 What correlation can you make between CPI and PPI?
 Unemployment - the percentage of people out of
work for 90 days or less.
• If unemployment is going up – what can the fed do?
 The Core – the fed takes out of CPI food, energy and
such because they can fluctuate tremendously.
 They like the number to be at 2.0% for the core.
The Federal Open Market Committee deems 2% to be
safe.
Well we can’t let it be zero, then as soon as something
bad happened we would be in trouble immediately. So
we try to keep it at 2% for a buffer – silly.
What happens when the fed gets to zero and the economy is
still awful? (look above at title of this slide)
The fed borrows money from SS or some other pool they
control and inject it directly into the economy by buying
bank bonds and such directly. This gives the banks
money on hand to lend out.
Method used by the Fed to try and stimulate the
national economy.
We are just ending QE3 2014
 Rate that banks charge other banks for overnight
access to the balances in their Reserve Bank accounts.
 Changes in rate affect short-term rates.
 Why would banks having more money available be
important to the economy?
 What happens if the fed drops the short term discount
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rate for lending?
What happens when banks decide to not loan any
money out?
What happens when you get paid under the table?
What happens when the cost of labor drops
significantly?
What happens when the cost of corn goes down?
What happens when gas prices go up?
 Why do you think increasing the discount rate will
help the economy? Think of a situation where it
would not help.
 In what ways does the GDP, CPI, and PPI effect the
Fed, and its monetary policies?
 Why is it important for the Fed to control the amount
of money within the economy? What would do much
money in the economy cause?
 Do you think Fed policies are used to help turn big, or
small gears of the economy? EXPLAIN
 The Fed has recently issued a Quantitative Easing,
what worries should they have about this? Do you
think that this will be successful?
 Do you think that the Fed should be strict or loose
with its regulation of business and the economy?
Should the Fed allow for business to run its course or
become involved?