1 / 20

Monetary Policy

Monetary Policy. By Teresa Stearns. Background Information. What is monetary policy? Who conducts monetary policy? FOMC. Main Goals. Price stability High employment Economic growth Stabilize foreign exchange rates. Goals of Monetary Policy. Provide price stability

barney
Download Presentation

Monetary Policy

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. MonetaryPolicy By Teresa Stearns

  2. Background Information • What is monetary policy? • Who conducts monetary policy? • FOMC

  3. Main Goals • Price stability • High employment • Economic growth • Stabilize foreign exchange rates

  4. Goals of Monetary Policy • Provide price stability • Inflation-creates chain reaction • Supplier passes on to customer (Monaco Coach) • What does Fed do to counteract inflation? • Increase interest rates • Goal of zero inflation?

  5. Goals of Monetary Policy

  6. Goals of Monetary Policy • Create high employment • Is it reasonable to want full employment? • No, because of frictional unemployment • What happens when the unemployment rate gets to high? • Stimulate economy by increasing money supply • Decrease interest rate

  7. Goals of Monetary Policy • Create economic growth • Need to increase the output of goods and services • Needs to be steady and sustainable • Provide high employment • How can we stabilize the economy in the short-run? • Decrease interest rates

  8. Goals of Monetary Policy • Stability in foreign exchange rates • What happens when Fed increases interest rates? • Value of dollar rises • Strong dollar vs Weak dollar • Who benefits?

  9. Goals of Monetary Policy

  10. Tools used to implement Monetary Policy • Reserve requirements • Discount window • Open market operations

  11. Reserve Requirements • Purpose? • Two components • Required reserves • Vault cash • Reserve balances • Amounts are determined by required reserve ratio • Excess reserves • Can borrow from other banks in federal funds market

  12. Reserve Requirements • Increase in required reserves • Reduces bank lending • Decreases spending for consumers • Businesses can’t expand • Decrease in required reserves • Increases lending by banks • More spending • Increases employment

  13. Discount Window • What is the discount window used for? • Banks can borrow from Fed when they can’t meet their required reserve amounts • Borrow at discount rate • Set above federal funds rate • Used as a last resort

  14. Discount Window • Strict guidelines when borrowing • Many fear using discount window • Produces bad image • Increase discount rate • Slows economy • Decrease discount rate • Stimulates economy

  15. Open Market Operations • When the Fed buys and sells government securities • Transactions take place through Trading Desk at NY Federal Reserve • Huge dollar transactions • Impact of buying and selling……

  16. Open Market Transactions

  17. Limitations of Monetary Policy • Does not have direct control over its outcomes • Primary use of interest rates • Lack up to the minute, reliable info • Use of various models • Revisions of data

  18. Limitations of Monetary Policy • Unexpected changes in supply and demand • “shocks” • Trade-off in goals • Which is more important? • Timing • Can take months to years to see effects

  19. Conclusion • Must consider all factors before announcing to public. • Can have huge impact with even the slightest changes. • They can only forecast to the best of their ability. • Biggest variable of all…..consumer.

More Related