Rating the Rates:Rating the Rates:The Fed’s Role The Fed’s Role

in the Larger Economyin the Larger Economy

By Tanya Hanson and Tom Glaser

Federal Reserve Bank of AtlantaLesson Plan Contest of the Year Contest, 2007––2008

Second Place

Confused Confused yet?yet?

Part IPart I

The Federal The Federal Reserve SystemReserve System

What is the What is the Federal Reserve System?Federal Reserve System?

The Federal Reserve System The Federal Reserve System is the nation’s central bank.is the nation’s central bank.

What is the structure What is the structure of the Fed?of the Fed?

Board of Governors Board of Governors 12 regional Reserve Banks12 regional Reserve Banks The Federal Open Market Committee The Federal Open Market Committee

(FOMC) (FOMC)

The Fed (continued)The Fed (continued)

About 37% of all banks are member banks, About 37% of all banks are member banks, including most large banks. including most large banks.

Reserve requirements established by the Reserve requirements established by the Federal Reserve Board apply to nonmember Federal Reserve Board apply to nonmember depository institutions and member banks. depository institutions and member banks.

Both classes of institutions are given access Both classes of institutions are given access to Federal Reserve discount borrowing and to Federal Reserve discount borrowing and Federal Reserve services on an equal basis.Federal Reserve services on an equal basis.

The functions of the FedThe functions of the Fed

Supervising and regulating banksSupervising and regulating banks

Providing financial servicesProviding financial services

Conducting monetary policyConducting monetary policy

What is monetary policy?What is monetary policy?

Federal Reserve actions to influence the Federal Reserve actions to influence the

availability and cost of money and availability and cost of money and

credit as a means of helping to promote credit as a means of helping to promote

maximum employment, stable prices, maximum employment, stable prices,

and moderate long-term interest rates. and moderate long-term interest rates.

What is the FOMC?What is the FOMC?

The Federal Open Market Committee The Federal Open Market Committee conducts monetary policyconducts monetary policy

12 members12 members

8 scheduled meetings a year8 scheduled meetings a year

What are the tools of What are the tools of monetary policy?monetary policy?

Open market operationsOpen market operations

Discount rateDiscount rate

Reserve requirementsReserve requirements

Open market operationsOpen market operations

Purchases and sales by the Fed of Purchases and sales by the Fed of government securities to influence the government securities to influence the volume of money and credit in the volume of money and credit in the economy.economy.

Purchases foster expansion of money Purchases foster expansion of money and credit; sales have the opposite and credit; sales have the opposite effect. effect.

Open market operations are the Federal Open market operations are the Federal Reserve’s most important and most Reserve’s most important and most flexible monetary policy tool. flexible monetary policy tool.

Discount policyDiscount policy Specifies the interest rate at which eligible Specifies the interest rate at which eligible

depository institutions may borrow funds, depository institutions may borrow funds, usually for short periods, directly from the usually for short periods, directly from the Federal Reserve Banks. Federal Reserve Banks.

The law requires the board of directors of The law requires the board of directors of each Reserve Bank to establish the discount each Reserve Bank to establish the discount rate every 14 days subject to the approval rate every 14 days subject to the approval of the Board of Governors in Washington.of the Board of Governors in Washington.

Reserve requirementsReserve requirements Reserves that must be held against customer Reserves that must be held against customer

deposits by banks and other depository deposits by banks and other depository institutions. institutions.

The Board of Governors sets reserve The Board of Governors sets reserve requirements within limits specified by law for requirements within limits specified by law for all depository institutions that have all depository institutions that have transaction accounts or nonpersonal time transaction accounts or nonpersonal time deposits. deposits.

A lower reserve requirement allows more A lower reserve requirement allows more deposit and loan expansion, and a higher deposit and loan expansion, and a higher reserve ratio permits less expansion.reserve ratio permits less expansion.

What is the What is the federal funds rate?federal funds rate?

This is an overnight rate charged This is an overnight rate charged by one depository institution to by one depository institution to another another for short-term loans.for short-term loans.

The FOMC sets the “target federal The FOMC sets the “target federal funds rate.”funds rate.”

Part IIPart II

Student Student ProjectProject

What are rates?What are rates?

The diversity of rates can cause confusion The diversity of rates can cause confusion among consumers’ understanding of among consumers’ understanding of financial markets and the overall financial markets and the overall economy.economy.

This lesson will help students understand This lesson will help students understand more about the Fed and a variety of rates more about the Fed and a variety of rates and how the Fed is involved in those rates.and how the Fed is involved in those rates.

Categories of ratesCategories of rates

Consumer finance ratesConsumer finance rates

Economic indicator ratesEconomic indicator rates

Monetary policy ratesMonetary policy rates

Fiscal policy ratesFiscal policy rates

Consumer finance ratesConsumer finance ratesThese apply to the consumer These apply to the consumer transactions of borrowing and saving transactions of borrowing and saving money. money.

Examples of borrowing include Examples of borrowing include mortgage rates, car loan rates, and mortgage rates, car loan rates, and college loan rates. In contrast, saving college loan rates. In contrast, saving includes CDs, IRAs, and bonds. includes CDs, IRAs, and bonds.

Economic indicator ratesEconomic indicator rates

Economic indicators, which are Economic indicators, which are aggregates or totals, measure the aggregates or totals, measure the overall health and stability of the overall health and stability of the economy. economy.

Examples of these indicators include Examples of these indicators include the inflation rate and the the inflation rate and the unemployment rate.unemployment rate.

Monetary policy ratesMonetary policy rates

These rates are determined by the These rates are determined by the Fed. Fed.

The goal of monetary policy is to The goal of monetary policy is to promote maximum employment, promote maximum employment, stable prices, and moderate long-stable prices, and moderate long-term interest rates.term interest rates.

Fiscal policy ratesFiscal policy rates

These rates are set by These rates are set by Congress as it uses the Congress as it uses the fiscal policy tools of fiscal policy tools of taxation and spending taxation and spending to achieve to achieve macroeconomic goals.macroeconomic goals.

Research assignmentResearch assignment

In this lesson, you will learn about many In this lesson, you will learn about many kinds of rates and what each means and kinds of rates and what each means and how each rate is related to the Federal how each rate is related to the Federal Reserve System. Reserve System.

You will research each term on your own or You will research each term on your own or in small groups and then report back to the in small groups and then report back to the entire class. This sharing will help you entire class. This sharing will help you develop a greater appreciation of the develop a greater appreciation of the complexity and interrelatedness of the complexity and interrelatedness of the economy, and the role economy, and the role of the Federal Reserve.of the Federal Reserve.

AssignmentAssignment

1.1. Student research assignmentStudent research assignment

2.2. Student presentationsStudent presentations

3.3. Student peer evaluationsStudent peer evaluations

4.4. Short essay: Based on your research and Short essay: Based on your research and the presentations, how do at least the presentations, how do at least three three of these rates relate to each other? of these rates relate to each other?

Use correct terminology to describe how Use correct terminology to describe how these rates are determined and how they these rates are determined and how they influence each other and the economy.influence each other and the economy.

Online resourcesOnline resources Board of Governors of the Federal Reserve system Board of Governors of the Federal Reserve system

publications.publications.http://www.federalreserve.gov/publications/default.htmhttp://www.federalreserve.gov/publications/default.htm

The Federal Reserve Board.The Federal Reserve Board. Research and history of the Federal Research and history of the Federal Reserve System. http://www.federalreserve.gov/Reserve System. http://www.federalreserve.gov/

The Federal Reserve Board Beige Book.The Federal Reserve Board Beige Book. A summary of current A summary of current economic conditions by the Federal Reserve. economic conditions by the Federal Reserve. http://www.federalreserve.gov/FOMC/BEIGEBOOK/2008/http://www.federalreserve.gov/FOMC/BEIGEBOOK/2008/

The Federal Reserve Bank of Minneapolis.The Federal Reserve Bank of Minneapolis. Publications Publications concerning current economic conditions. concerning current economic conditions. http://minneapolisfed.org/pubs/region/99-03/beige.cfmhttp://minneapolisfed.org/pubs/region/99-03/beige.cfm

The Federal Reserve Bank of New York.The Federal Reserve Bank of New York. Information about the Information about the Federal Open Market Committee (FOMC) and monetary policy.Federal Open Market Committee (FOMC) and monetary policy.http://www.newyorkfed.org/aboutthefed/fedpoint/fed48.htmlhttp://www.newyorkfed.org/aboutthefed/fedpoint/fed48.html

Online resources Online resources (continued)(continued)

Federal Reserve Bank of San Francisco.Federal Reserve Bank of San Francisco. Glossary of Glossary of monetary economic terms. http://www.frbsf.org/tools/glossary/monetary economic terms. http://www.frbsf.org/tools/glossary/

U.S. Department of Treasury.U.S. Department of Treasury. Site for current economic Site for current economic policy and domestic financial information. policy and domestic financial information. http://www.ustreas.gov/offices/http://www.ustreas.gov/offices/

The Free Dictionary.The Free Dictionary. Glossary for financial economic terms. Glossary for financial economic terms. http://www.thefreedictionary.com/http://www.thefreedictionary.com/

The Money Café.The Money Café. Additional glossary for financial economic Additional glossary for financial economic terms. http://www.moneycafe.com/library/terms. http://www.moneycafe.com/library/

BNET: The Business Net.BNET: The Business Net. Search engine for business terms. Search engine for business terms. http://www.bnet.com/http://www.bnet.com/

Investopedia.Investopedia. Search engine for financial terms. Search engine for financial terms. http://www.investopedia.com/dictionary/default.asphttp://www.investopedia.com/dictionary/default.asp

Business Dictionary.Business Dictionary. A resource for business terms. A resource for business terms. http://www.businessdictionary.com/http://www.businessdictionary.com/

Publications onlinePublications online In PlainIn Plain English: Making Sense of the Federal Reserve.English: Making Sense of the Federal Reserve.

Federal Reserve Bank of St. Louis. Federal Reserve Bank of St. Louis. http://stlouisfed.org/education/resourcetools/http://stlouisfed.org/education/resourcetools/

The Federal ReserveThe Federal Reserve.. Federal Reserve Bank of Dallas. Federal Reserve Bank of Dallas.

Banking BasicsBanking Basics.. Federal Reserve Bank of Boston. Federal Reserve Bank of Boston.

Federal Reserve Structure and FunctionsFederal Reserve Structure and Functions.. Federal Reserve Bank of Federal Reserve Bank of Atlanta.Atlanta.

History of Central BankingHistory of Central Banking.. Federal Reserve Bank of Philadelphia Federal Reserve Bank of Philadelphia

A Day in the Life of the FOMCA Day in the Life of the FOMC.. Federal Reserve Bank of Philadelphia. Federal Reserve Bank of Philadelphia.

How to Establish, Use, and Protect CreditHow to Establish, Use, and Protect Credit.. Federal Reserve Bank of Philadelphia.Federal Reserve Bank of Philadelphia.

The Story of the Federal Reserve SystemThe Story of the Federal Reserve System.. Federal Reserve Bank of New York.Federal Reserve Bank of New York.

The Story of InflationThe Story of Inflation.. Federal Reserve Bank of New York. Federal Reserve Bank of New York.

The Story of Monetary PolicyThe Story of Monetary Policy.. Federal Reserve Bank of New York. Federal Reserve Bank of New York.