Download Monetary Policy - Chandler Unified School District

Monetary Policy
• The actions that the Federal Reserve System takes to
influence the level of real GDP and the rate of inflation in
the economy.
Purpose
A privately owned
system of 12 member
banks that is publically
controlled by the
federal government.
The federal
government does not
own any stock in the
Fed, but it appoints its
leaders and makes
laws to regulate it.
What is the Federal
Reserve System?
7 Governors
appointed by the
President for 14
year terms under
advice and consent
from the Senate.
Chairman of the
Fed: President
appoints one of the
Governors to a
renewable 4 year
term
Chairman
of the Fed
Structure of the Fed
•
•
•
•
Chicago
Atlanta
Cleveland
Minneapolis
• Richmond
• San Francisco
•
•
•
•
Dallas
Kansas City
Philadelphia
St. Louis
• Boston
• New York City
12 District Banks
Monitors and reports on economic conditions in
their district. Oversees member banks.
• All nationally chartered banks are required to
join the Fed
• Approximately 2600 member banks today
• Member banks are the “stockholders” of the Fed
Member Banks
Serve
Government
• Maintain
Treasury
Department
checking
account
• Sell, transfer,
and redeem
government
securities
• Issue
currency
Serve Banks
Regulate Banks
• Check
clearing
• Lender of last
resort
• Approve
charters and
proposed
mergers
• Enforce truthin-lending
laws
• Sets reserve
requirements
• Conducts
bank
examinations
Functions of the Fed
Regulate
Money Supply
• Monitors
indicators of
money supply
• Adjusts the
money supply
to stabilize
the economy
• Reserve Requirements – Banks are required to
keep a certain percentage of their customers’
deposits. They loan out the rest. The Fed sets this
percentage requirement.
Example: You deposit $100 in your bank account. The
current reserve requirement is 10%. Your bank is
required to keep $10 of your deposit on hand, but can
lend out $90 to other members of your bank in car
loans, home loans, etc…
Tools
• Discount Rate / Federal Funds Rate –
When banks need more money, they can borrow
from each other at a certain interest rate (FFR), or
in emergencies they can borrow from their
district bank (DR). The Fed indirectly sets the
FFR rate but directly sets the discount rate.
Tools
• Open Market Operations –
The buying and selling of government securities in
order to change the money supply. The FOMC
(Federal Open Market Committee) will order the
Federal Reserve Bank of New York to either
purchase or sell a certain quantity of government
securities on the open market.
This is the Fed’s most important tool
Tools
Expansionary Policy
(Easy Money )
Contractionary Policy
(Tight Money)
• Reserve requirement
• Reserve Requirement
• Discount rate
• Discount Rate
• Open Market
• Open Market
Operations
BUY
Operations
Expansionary and
Contactionary Policy
SELL
• Timing
1. Bad Timing – If timing of a policy change is bad, it could actually
make the situation worse
2. Inside Lag – Takes time to recognize a problem…and then more time
to enact the policy to fix it.
3. Outside Lag – Takes time for the policy to become effective
• Predicting the Business Cycle – Monetary
policymakers often don’t know how long a problem will last. So
should they fix it (long term problem)....or let it fix itself (short term
problem).
Limitations