Monetary Policy – actions the Fed takes to influence the level of real GDP and the rate of inflation in the economy

(The Fed = The Federal Reserve)

The Board of Governors Headquartered in Washington, D.C.7 members Appointed by President, confirmed

by Senate Staggered terms of 14 years

Why?Geographical restrictions

Appointed by President, confirmed by Senate4-year terms, renewable Alan Greenspan was a notable Chairman (took office in 1987 - 2006)

•This is Ben Bernanke.•Does anyone know the newest Chairman of the Federal Reserve?

•Janet Yellen was sworn in as Chair of the Fed in February 2014.•She is the first woman to hold this position!

•12 federal reserve districts•One federal reserve bank located in each•Each monitors and reports on economic and banking conditions in its district•Each bank has board of nine directors that represents many groups’ interests

In which district is Pittsburgh located? Where is our district Fed bank, then?Color your maps

All nationally chartered banks are required to join Federal Reserve System

Many state-chartered banks join voluntarily

Approximately 4,000 Fed member banks

FAC (Federal Advisory Council) collects info about each district and reports to Board of Governors

Makes key decisions about interest rates and growth of money supply

Meet 8 times a year Members come from

Board of Governors and district reserve bank presidents

Serving Government Federal Government’s

banker Government securities

(bonds, bills, and notes) selling

Issuing currency

Check Clearing – how banks record whose account gives up money and whose account receives money

Supervising lending practices ▪ Monitors bank reserves to

make sure banks don’t lend out too much money at one time

▪ Study proposed bank mergers to make sure there is competition

▪ Enforce truth-in-lending laws – must give full and accurate info about loan terms

Lender of Last Resort▪ Usually, banks borrow

from each other to meet their daily reserve requirement (fed funds rate)

▪ Sometimes they need to borrow from Federal Reserve (discount rate)

Reserves – fractions of funds that banks have to hold (can’t loan out and earn interest) Banks report to Fed

about their reserves daily

Bank examinations Examiners make

unexpected bank visits to make sure banks aren’t being too risky

The Fed considers M1, M2, and M3 – compares the money supply to the demand for money

Factors that Affect Demand for Money Cash needed on

hand Interest rates Price levels in the

economy General level of

income

Stabilizing the Economy Too much money in

the economy leads to inflation

Fed tries to increase MS to match the growth in demand for money

Reserve Requirement RatioRates (Fed Funds Rate and Discount

Rate)Open Market Operations

The fraction of reserves that banks MUST hold (what they cannot lend out)

If the Fed wants to increase the money supply, they can lower this Would free up more money for them to lend

out If the Fed wants to contract the money

supply, they can raise this. Would make banks hold on to more money

and able to lend out less.

Both the fed funds rate and the discount rate are the interest rates that BANKS must pay to borrow money Fed funds rate – the rate banks pay to

borrow money from OTHER BANKS Discount rate – the rate banks pay to

borrow money from the Fed If the Fed wants to increase the money

supply, they will lower these rates so that banks can borrow more money (and then lends out more money to customers)

The buying and selling of treasury securities

(Think savings bonds, war bonds, etc.) If the Fed wants to increase the money

supply, they will BUY bonds from the public (because this will put money in people’s hands)

If the Fed wants to decrease the money supply, they will SELL bonds to the public (because this will take money out of people’s hands)