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The Federal Reserve

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  1. The Federal Reserve How our Central Bank is structured

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

  3. 3 Primary Functions of Fed • Regulates banks • ensure banks follow laws (housing bubble—what happened?) • Acts as Banker’s Bank • Makes emergency loans to banks => “lender of last resort” • Discount rate: interest rate Fed charges banks (currently 0.75%) • Conducts Monetary Policy • regulates money supply to control short term interest rates • Federal Funds Rate: interest rate Fed sets (currently 0.0%)

  4. The Federal Reserve System Federal Reserve Board (7-Governors in Washington) 12-District Banks Ben Bernanke Worked at Fed since 2002 Chairmen of Fed since 2006 (Term ends Jan. 2014) Re-appointed for 2nd term 2009

  5. Federal Open Market Committee(FOMC) • Main policy-making part of Federal Reserve (12 members) • Meets 8-times per year to vote on Monetary Policy ↑ Money Supply ↓ Short term interest rates =>

  6. Federal Reserve in action 1999 - 2012 0.0% 2012

  7. 2 Primary Goals of Fed What makes these 2-Goals in direct conflict? Goal #1 Maximum output & employment Goal #2 Stable Prices LRAS1 SRAS1 Price Level AD1 Real GDP Answer: High GDP & Low Unemployment can lead to inflation i.e. solving goal #1 often will risk failing at goal #2

  8. Video Interview #1: Bernanke’s Plan: U.S. Economy LRAS1 SRAS1 Price Level AD1 Real GDP