Federal Reserve Board Chairperson
Federal Reserve Board (7)
Federal Open Market Committee (12)
Deliberate changes in money supply to influence interest rates, total level of spending in economy
Goal is to achieve & maintain price-level stability, full-employment, & economic growth

Open-market operations
Reserve ratio
Discount rate

Bond markets are open to buyers & sellers of corporate & government bonds (securities)
Fed’s Open-market operations consist of buying bonds from or selling bonds to commercial banks & general public
The most important instrument for influencing the money supply

Raising the reserve ratio increases amount of required reserves banks must keep  reduces money supply
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Forces banks to reduce amount of checkable deposits
Lowering reserve ratio decreases amount of required reserves banks must keep  increases money supply
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Transforms required reserves into excess reserves, enhancing ability of banks to create new money by lending

Fed is “lender of last resort”
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Short-term loans to commercial banks in need in its district (12)
Discount Rate: Interest rate Fed charges to commercial banks
Borrowing from Federal Reserve Banks by commercial banks increases reserves of commercial banks & enhances their ability to extend credit
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Lowering discount rate increases money supply
Increasing discount rate decreases money supply

Aka Expansionary Monetary Policy
To combat recession & unemployment,
Fed decides to increase money supply.
How:
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Buy securities
Lower reserve ratio
Lower discount rate

Aka Restrictive Monetary Policy
To reduce spending & control inflation,
Fed wants to reduce aggregate demand by contracting supply of money
How:
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Sell securities
Increase reserve ratio
Raise discount rate

Strengths:
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Speed & Flexibility (v. Fiscal Policy)
Isolation from Political Pressure (14 year terms)
Shortcomings & Problems
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Less control due to changes banking practices
(bank reform & electronic transactions)
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Changes in velocity
 Velocity of money: number of times per year average dollar is spent on goods & services
Cyclical asymmetry: less reliable in pushing economy from recession

Focus of Fed’s monetary policy to stabilize the economy
Interest rates in general rise & fall w/ Federal
Funds rate
Prime interest rate: rate banks charge their most creditworthy customers, parallels FFR
By changing the FFR, Fed is changing economy’s overall interest rates
Fed announces changes in monetary policy by announcing changes for target FFR

Net Export Effect
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Expansionary monetary policy (lower FFR) decreases foreign demand for dollars, increases net exports & dollar depreciates
Restrictive monetary policy (higher FFR) increases foreign demand for dollars, decreases net exports & dollar appreciates