Monetary Policy Federal Reserve and Macroeconomic Policy History

Monetary Policy Federal Reserve and Macroeconomic Policy

History of the Fed • • Created by Congress in 1913 Nation’s Central Bank Response to bank failures and panics Main Job: Conduct monetary policy – Regulate amount of money in economy • Promote economic growth Full Employment • Limit inflation • Other jobs – Make and enforce rules for banks – Financial services (ex. Check clearing)

Structure of the Fed • Board of Governors: Run the Fed System – 7 Governors, 14 year terms – Chairman selected from board (Ben Bernanke) – Appointed by President, confirmed by Senate • Federal Open Market Committee (FOMC) • Federal Reserve Banks (12)

Monetary Policy • Conducted by FOMC • Open Market Operations – Affects Federal Funds Rate – Buying and selling government securities (bonds) • Buying securities Increases money supply banks have more money to lend lower interest rates consumers and businesses borrow and spend more fights unemployment and recessions • Selling securities Decreased money supply fight inflation – Current Fed Funds Rate = approximately 0 %

Other Monetary Policies • Discount Rate changes – Interest rate Fed charges banks to borrow money from the Fed – Current Discount Rate =. 75% • Reserve Requirement changes – % of deposits banks must hold – 3% for banks with $10 -$55 million – 10% for banks with over $55 million

“Easy Money” Monetary Policy • Fight Recessions, Unemployment • Open Market Operations – Buy government securities from banks – Lower Fed Funds Rate • Lower Discount Rate • Lower Reserve Requirement

“Tight Money” Monetary Policy • Fight Inflation • Open Market Operations – Sell government securities to banks – Raise Fed Funds Rate • Raise Discount Rate • Raise Reserve Requirement