Dual mission:
To keep the economy growing
Keep inflation under control
Board of governors
Chairperson (appointed by the president, approved by the senate)
Currently = Jannette Yeilen
Famous prior chair chairpersons = Paul Volcker, Alan Greenspan, Ben Bernanke.
Job #1: Open market operations (OMO)
Moving cash in and out of the economy through New York bond market
The fed BUYS BONDS so that the public has more cash. BB=BB
The fed SELLS BONDS to remove cash from the economy. SB=SB
Job #2: Federal fund rate
A higher FFR target slows down inter-bank borrowing and therefore public borrowing.
A lower FFR target speeds up inter-bank borrowing and therefore public borrowing.
Job #3: Discount rate
A higher DR means that banks will pay more to borrow from the fed.
A lower DR means that the banks pay less to borrow from the fed.
Job #4: Reserve Requirement
A high RR means that banks have to hold more in vaults and therefore limit private loans.
A low RR means that banks can hold less in vaults and therefore expand private loans.
DR: FDIRC banks in institutions may borrow short term loans from the fed.
The feds set that interest amount.
Increase nominal interest rate = discourage
“Last resort” = higher rate
Prime rate: the nominal interest rate that the banks charge their most credit worthy borrowers.
Required reserves: % of what the bank requires.
Cannot be used for loans
When RR is raised, it forces banks to reduce loans.
When RR is lowered it allows banks to create more money.
Federal fund rate: unofficial fourth tool of mm.
This is where banks loan eachother overnight funds.
It is an interest rate
Borrowing from another bank
Lower rate
Monetary creation process(assume 10% reserve requirement)
- $1000 in cash deposited into a checking accounts which leads to change in ms ...
- $1000 FED purchase of bonds from the public [deposited into the checking account] which leads to intermediate increase of ms $1000...
CONCLUSION: assets required reserve is $1000 and liabilities of demand deposits was $1000.
Required reserves =$1000 (.10x1000 deposit)
Single bank: Amount of money a single bank can create (loan out) = ER
Actual reserves - Required reserves= access reserves
$1000-1000=900
Banking system: can create money by a multiple of its initial excess reserves
money multipliers= 1/rr = 1.10 =10
System new money = deposit multiplier x initial excess reserver
10 x 900= 9000
Total change in the money supply as a result of the deposit.(initial deposits if new + banking system creating money= total change in ms)
If initial deposit it is not new money, the total change in ms is only the new money created by the banking= $9000
Banking system or money supply= use monetary multiplier
Expansionary monetary policy “easy” (recession): buys bonds, rr decrease, dr decrease, FFR decrease, interest rate decrease, ig increases, ad increases, ms increases, negative money depreciate.
Contractionary monetary policy “tight” money (inflation): sell bonds, rr increases, dr increases, FFR increases, nominal interest rate negative increases, ig negative increases, ad negative increases, ms negative increases, money appreciate
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