The Federal ReserveHow our Central Bank is structured

Critical Thinking

• How & Why is the Fed independent from Government?

How? Why?

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%)

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

Federal Open Market Committee (FOMC)

• Main policy-making part of Federal Reserve (12 members)– Meets 8-times per year to vote on Monetary Policy

↓ Short term interest rates

↑ Money Supply =>

Federal Reserve in action 1999 - 2012

2012

0.0%

2 Primary Goals of Fed

Goal #1

Maximum output & employment

Goal #2

Stable Prices

What makes these 2-Goals in direct conflict?

Answer: High GDP & Low Unemployment can lead to inflation

i.e. solving goal #1 often will risk failing at goal #2

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PriceLevel

RealGDP

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RealGDP

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Video Interview #1:

Bernanke’s Plan: U.S. Economy

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