Rating the Rates The Feds Role in the

Rating the Rates: The Fed’s Role in the Larger Economy By Tanya Hanson and Tom Glaser Federal Reserve Bank of Atlanta Lesson Plan Contest of the Year Contest, 2007– 2008 Second Place

Confused yet?

Part I The Federal Reserve System

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

What is the structure of the Fed? § Board of Governors § 12 regional Reserve Banks § The Federal Open Market Committee (FOMC)

The Fed (continued) § § § About 37% of all banks are member banks, including most large banks. Reserve requirements established by the Federal Reserve Board apply to nonmember depository institutions and member banks. Both classes of institutions are given access to Federal Reserve discount borrowing and Federal Reserve services on an equal basis.

The functions of the Fed § Supervising and regulating banks § Providing financial services § Conducting monetary policy

What is monetary policy? § Federal Reserve actions to influence the availability and cost of money and credit as a means of helping to promote maximum employment, stable prices, and moderate long-term interest rates.

What is the FOMC? § The Federal Open Market Committee conducts monetary policy § 12 members § 8 scheduled meetings a year

What are the tools of monetary policy? § Open market operations § Discount rate § Reserve requirements

Open market operations § § § Purchases and sales by the Fed of government securities to influence the volume of money and credit in the economy. Purchases foster expansion of money and credit; sales have the opposite effect. Open market operations are the Federal Reserve’s most important and most flexible monetary policy tool.

Discount policy § § Specifies the interest rate at which eligible depository institutions may borrow funds, usually for short periods, directly from the Federal Reserve Banks. The law requires the board of directors of each Reserve Bank to establish the discount rate every 14 days subject to the approval of the Board of Governors in Washington.

Reserve requirements § § § Reserves that must be held against customer deposits by banks and other depository institutions. The Board of Governors sets reserve requirements within limits specified by law for all depository institutions that have transaction accounts or nonpersonal time deposits. A lower reserve requirement allows more deposit and loan expansion, and a higher reserve ratio permits less expansion.

What is the federal funds rate? § § This is an overnight rate charged by one depository institution to another for short-term loans. The FOMC sets the “target federal funds rate. ”

Part II Student Project

What are rates? The diversity of rates can cause confusion among consumers’ understanding of financial markets and the overall economy. This lesson will help students understand more about the Fed and a variety of rates and how the Fed is involved in those rates.

Categories of rates § Consumer finance rates § Economic indicator rates § Monetary policy rates § Fiscal policy rates

Consumer finance rates These apply to the consumer transactions of borrowing and saving money. Examples of borrowing include mortgage rates, car loan rates, and college loan rates. In contrast, saving includes CDs, IRAs, and bonds.

Economic indicator rates Economic indicators, which are aggregates or totals, measure the overall health and stability of the economy. Examples of these indicators include the inflation rate and the unemployment rate.

Monetary policy rates These rates are determined by the Fed. The goal of monetary policy is to promote maximum employment, stable prices, and moderate long-term interest rates.

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

Research assignment In this lesson, you will learn about many kinds of rates and what each means and how each rate is related to the Federal Reserve System. You will research each term on your own or in small groups and then report back to the entire class. This sharing will help you develop a greater appreciation of the complexity and interrelatedness of the economy, and the role of the Federal Reserve.

Assignment 1. 2. 3. 4. Student research assignment Student presentations Student peer evaluations Short essay: Based on your research and the presentations, how do at least three of these rates relate to each other? Use correct terminology to describe how these rates are determined and how they influence each other and the economy.

Online resources § Board of Governors of the Federal Reserve system publications. http: //www. federalreserve. gov/publications/default. htm § The Federal Reserve Board. Research and history of the Federal Reserve System. http: //www. federalreserve. gov/ § The Federal Reserve Board Beige Book. A summary of current economic conditions by the Federal Reserve. http: //www. federalreserve. gov/FOMC/BEIGEBOOK/2008/ § The Federal Reserve Bank of Minneapolis. Publications concerning current economic conditions. http: //minneapolisfed. org/pubs/region/99 -03/beige. cfm § The Federal Reserve Bank of New York. Information about the Federal Open Market Committee (FOMC) and monetary policy. http: //www. newyorkfed. org/aboutthefed/fedpoint/fed 48. html

Online resources (continued) § § § § Federal Reserve Bank of San Francisco. Glossary of monetary economic terms. http: //www. frbsf. org/tools/glossary/ U. S. Department of Treasury. Site for current economic policy and domestic financial information. http: //www. ustreas. gov/offices/ The Free Dictionary. Glossary for financial economic terms. http: //www. thefreedictionary. com/ The Money Café. Additional glossary for financial economic terms. http: //www. moneycafe. com/library/ BNET: The Business Net. Search engine for business terms. http: //www. bnet. com/ Investopedia. Search engine for financial terms. http: //www. investopedia. com/dictionary/default. asp Business Dictionary. A resource for business terms. http: //www. businessdictionary. com/

Publications online n In Plain English: Making Sense of the Federal Reserve Bank of St. Louis. http: //stlouisfed. org/education/resourcetools/ n The Federal Reserve Bank of Dallas. n Banking Basics. Federal Reserve Bank of Boston. n Federal Reserve Structure and Functions. Federal Reserve Bank of Atlanta. n History of Central Banking. Federal Reserve Bank of Philadelphia n A Day in the Life of the FOMC. Federal Reserve Bank of Philadelphia. n How to Establish, Use, and Protect Credit. Federal Reserve Bank of Philadelphia. n The Story of the Federal Reserve System. Federal Reserve Bank of New York. n The Story of Inflation. Federal Reserve Bank of New York. n The Story of Monetary Policy. Federal Reserve Bank of New York.