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Monetary Policy and The Federal Reserve

Monetary Policy and The Federal Reserve. Chapter 15. In Plain English Video. Take notes Focus on the Board of Governors (BoG) Federal Reserve Banks (RB) Federal Open Market Committee (FOMC). Fed Funds Rate.

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Monetary Policy and The Federal Reserve

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  1. Monetary Policy and The Federal Reserve Chapter 15

  2. In Plain English Video • Take notes • Focus on the • Board of Governors (BoG) • Federal Reserve Banks (RB) • Federal Open Market Committee (FOMC)

  3. Fed Funds Rate • FDIC member banks loan each other overnight funds in order to balance deposit accounts each day. • The ir they use to loan each other is the FFR. • The FOMC targets this rate by suggesting an increase or decrease in the ir • Currently at .25%

  4. Discount Rate • FDIC banks may borrow short term loans directly from the FED • This is the discount window and is set above the FFR (currently .5%) • Banks do not like to use the window—the FED is the “last resort” • FOMC sets the Discount Rate

  5. Prime Rate • ir that banks charge their most “credit worthy” borrowers • Historically, the Prime Rate has been 3% higher than the FFR • So it is 3.25% today

  6. Easy Money Policy (expansionary) • The Fed wants the money supply to grow • Lower all interest rates = people will borrow more • Buy back bonds (open market operation) • SEE GRAPH -- DOCUMENT CAMERA

  7. Tight Money Policy (contractionary) • The Fed wants to get money out of the system • Increase all interest rates = people borrow less • Why take money out? • INFLATION • Sell bonds (open market operation) • SEE GRAPH -- DOCUMENT CAMERA

  8. Required Reserve • The amount of money the Fed requires each bank to hold (amount they are not allowed to loan) • Currently at 10%

  9. The Money Multiplier • 1/rr (required reserve)

  10. Reserve Multiplier example • Assume Bank A receives a deposit of $1,000. Bank A has a required reserve (rr) of 10%. • They must put $100 in the vault but can lend out $900. • Someone borrows the $900, uses it and it ends up in Bank B. • Bank B must now put $90 in the vault but can lend out $810 to a new person

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