Monetary Policy

What is The Fed? That’s what we’re going to learn about in this section on monetary policy: Actions by the Federal Reserve (Central Bank) to change the money supply in order to stabilize the economy. Often times there’s confusion about what the Federal Reserve is and whether or not it is a private bank – it is not a private bank. The Federal Reserve, often referred to as “The Fed” is the central bank of the U.S. and central banks are not unique to the U.S., as most countries have them. Although the goals/procedures of each country’s central bank may differ, they all typically address stabilizing the money supply in order to stabilize the economy.
In the U.S., The Fed has a dual mandate of maximum employment (equal to the natural rate of unemployment) and stable prices (2% to 3% inflation per year). In addition to their dual mandate, The Fed also has the goal of stability in the financial markets and long-term economic growth. The Fed is part of the U.S. government but has independence/autonomy with some checks and balances built into the system. For example, the President appoints The Fed Chair as well as other Federal Reserve Governors and the appointees must be confirmed by the Senate. The appointees have term limits and there are also 12 district Federal Reserve branches spread throughout the country. The following videos discuss more about the structure of the Federal Reserve and its goals and you can learn more about The Federal Reserve system here.
For this discussion, we’re going to discuss The Feds policy on adjusting the Federal Funds Rate (FFR). The FFR is the rate that one commercial bank such as Chase or Bank of America, lends to another bank, typically for a short-term loan of only a day or two. This may occur when, for example, the reserves of a bank fall close to their required reserves (maybe they had an unusual amount of withdraws from their customers on a particular day) and in order to avoid a potential fine from The Fed (which regulates and oversees all commercial banks), they borrow from another bank. It’s often assumed that The Fed sets the FFR but in actuality, they target the FFR through open market operations.
Initial Discussion Post:
The following chart shows the trend in the FFR since 2000. As you’ll notice, there are times when The Fed raises and lowers the FFR as well as keeps it relatively constant.
Effective Federal Funds Rate
1. Explain the impact that raising and lowering the FFR has on the economy (3 – 5 sentences).
2. In reviewing the trend since 2000, do you agree or disagree with The Feds policy regarding the FFR? Within your response, describe the monetary policy response that The Fed was taking and why. If you’re not sure what was going on with other macroeconomic variables over this time frame, use FRED! Try search for macroeconomic variables that we’ve learned about this semester such as Real GDP, Unemployment, Inflation (CPI), or others. These additional variables can help illustrate some of the context around what was happening over that time frame and help you to include more content within your discussion post (1 – 2 paragraphs).
Peer response:
1. Choose 1 peer posting and respond. Do you agree with their analysis? Are there any aspects and/or concepts that you could elaborate on? Or, share some additional aspects about monetary policy that you find relevant to their post (1 – paragraph).