The Federal Reserve How our Central Bank is

The Federal Reserve How our Central Bank is structured

3 Primary Functions of Fed • Regulates banks – ensure banks follow laws • Acts as Banker’s Bank – making loans to banks => lender of last resort • Conducts Monetary Policy – regulates money supply to control short term interest rates

Critical Thinking • Why & How is the Fed independent from Government?

The Federal Reserve System Federal Reserve Board (7 -Governors in Washington) 12 -District Banks Ben Bernanke Chairmen of Fed Term ends Jan. 2014 Re-appointed for 2 nd term

Federal Open Market Committee (FOMC) • Main policy-making part of Federal Reserve (12 members) • Meets 8 -times to vote on Monetary Policy

2 Primary Goals of Fed Goal #1 Maximum output & employment Goal #2 Stable Prices What makes these 2 -Goals in direct conflict? Answer: High GDP & Low Unemployment can lead to inflation i. e. solving goal #1 often will risk failing at goal #2

2 -Types of Inflation • Demand-Pull Inflation: – Too many dollars chasing too few goods – Spending increases faster than production – Demand Side Inflation • Cost-Push Inflation – Increase in cost of any factors of production (input prices) – examples: price of oil, labor, steel, etc…. ) – Supply Side Inflation

Quantitative Easing http: //www. npr. org/blogs/money/2010/10/07/130408926/quantitative-easing-explained • Fed controls only short term interest rates – Which are already at ZERO percent – Traditional monetary policy can’t do anymore • Goal: is to solve the credit crunch – Get banks to make loans again… • Strategy: buy Gov’t bonds to lower long term interest rates – Lower interest rates => lead to more investment

Bernanke’s Plan: 2010 U. S. Economy Price Level LRAS 1 AD 1 Real GDP SRAS 1