The document summarizes various tools and concepts related to monetary policy in the United States. It discusses open market operations conducted by the Federal Open Market Committee to influence money supply and interest rates. It also outlines discount rates set by the Federal Reserve, reserve requirements for banks, and how these tools can be used to fight inflation and recession by expanding or contracting the money supply. Transmission mechanisms and potential limitations like the liquidity trap are also summarized. Key banking and monetary control acts that impacted regulation are briefly explained.
The document summarizes various tools and concepts related to monetary policy in the United States. It discusses open market operations conducted by the Federal Open Market Committee to influence money supply and interest rates. It also outlines discount rates set by the Federal Reserve, reserve requirements for banks, and how these tools can be used to fight inflation and recession by expanding or contracting the money supply. Transmission mechanisms and potential limitations like the liquidity trap are also summarized. Key banking and monetary control acts that impacted regulation are briefly explained.
The document summarizes various tools and concepts related to monetary policy in the United States. It discusses open market operations conducted by the Federal Open Market Committee to influence money supply and interest rates. It also outlines discount rates set by the Federal Reserve, reserve requirements for banks, and how these tools can be used to fight inflation and recession by expanding or contracting the money supply. Transmission mechanisms and potential limitations like the liquidity trap are also summarized. Key banking and monetary control acts that impacted regulation are briefly explained.
Discount Rate Reserve Requirements How Open-Market Operations Work - The Federal Reserve purchases a security
bonds to increase money supply and to
reduce the money supply the FED sells the bonds. The Federal Open-Market Committee Open – market operations are conducted by the Federal Open – Market Committee. The Federal Open – Market Committee is the group within the Federal reserve that creates monetary policy. The Federal Open - Market Committee consist of 12 people. Discount Rate and Federal Funds Rate Changes Discount rate - interest rate paid by member banks when they borrow at the Federal reserve district bank.
Federal Funds Rate
-Is the interest rate that depository institutions ,banks, savings and loans, and credit unions, charge each other for overnight loans. Changing Reserve Requirements Increasing reserve requirements, the Federal Reserve is essentially taking money out of the money supply and increasing the cost credit. Lowering the reserve requirements pumps money into the economy by giving bank excess reserve, which expands the bank credit and lowers rate. The Fed’s effectiveness in fighting Inflation and Recession When the Fed increase the rate of monetary growth, this tends to raise GDP growth.
The monetary policy is having some difficulty
in handling recession, because business Transmission Mechanism: Expansionary Monetary Policy Transmision Mechanism: Contractionary The Liquidity Trap Liquidity Trap - when monetary policy becomes ineffective due to a very low interest rates combined with consumers who prefer to save raher than invest in higher – yielding bonds or other investments.
John Maynard Keynes determined that at a very
low interest rates people would not lend out their money. The Depository Institutions Deregulation and Monetary Control Act of 1980 Key Provisions 1. All depository instituions are now subject to the Fed’s legal reserve requirements 2. All depository institutions are now authorized to issue checking deposits. 3. All depository institutions now enjoy all the advantages that only Federal Reserve member banks formerly enjoyed. The Banking act of 1999 The Gram – Leach – Bliley Act - partially deregulates the financial industry. - The law repealed big parts of the Glass – Steagall Act of 1933. Monetary Policy Lags Fiscal and Monetary Policy Should Mesh Who controls our Interest Rates? The financial dependency of the U.S. Treasury will have the foreign countries controlled the Interest Rates. This foreign countries include, Shanghai, Tokyo, London, Frankfurt and other financial capitals. Current Issue: The Housing Bubble, the Subprime Mortgage Mess, and the Financial Crisis of 2008