Fed's and their policies

Structure and Responsibility of the Fed

By Frank Hughes Jr.

What is the Federal Reserve?

​Federal Reserve Chair since 2018

He is set to serve until 2028

​Jerome Powell

The Structure of the Fed

Federal Open Market Committee

The Next Two Slides Show the Five Functions of the Federal Reserve

The Next Two Slides Show the Five Functions of the Federal Reserve

The Fed's Dual Mandate

The Federal Reserve and Monetary Policy

How the Fed addresses its Dual Mandate

Keep inflation at 2%
Room for growth
Predictable

​​Price Stability

Unemployment rate between 3,5%-4.5%
(Frictional Employment)
Encourages Job Growth

Full Employment

Money Creation

Banks create money by making loans
More loans creates more money in the system
More money creates more demand

​Fractional Banking

Money is deposited in a bank
Banks loan out available money
New loans allow more spending and others to deposit money
Banks use new deposits to make more loans
New loans allow more spending and so on and so on

Using bank deposits to make loans allows the creation of money

Fractional Banking

Monetary Policy

​Controlling the economy by controlling money supply

The Fed wants more money circulating when the economy is slow and wants less money circulating when the economy is over-heated

Easy money
Lower interest rates
Higher money supply
Increase spending

Expansionary Policy

Tight money
Higher interest rates
Lower money supply
Slow spending

Contractionary Policy

Monetary Policy

Monetary Policy Tools

Reserve Requirements

This is the percentage of bank deposits that the Fed requires banks to keep on deposit and CANNOT use to make loans

Minimum amount member banks must keep on deposit at a bank
Lower minimum gives banks more money to lend
Higher minimum gives banks less money to lend

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​Reserve Requirement

Monetary Policy Tools

Discount Rate

Interest rate the Fed charges to commercial banks to borrow money

Interest rate the Fed charges member banks to borrow money
Higher rates increase costs (Less borrowing)
Lower rates decrease costs
(More borrowing)

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Discount Rate

Fed removes money from banks and decreases the money supply

Fed sells securities

Fed adds money into the banks and increases the money supply
Buy Bonds - Bigger money supply

Fed buys securities

Monetary Policy Tools: Open Market Operations (Gov't securities and bonds)

Guided by the Federal Open Market Committee (FOMC)

The FOMC sets a target for interest rates through the Federal Funds Rate
The Federal Funds Rate is the interest member banks pay to borrow money overnight from other banks
Higher rates make borrowing more expensive
Lower rates make borrowing less expensive
This sets a base for other interest rates