POL 321 Lecture Notes - Lecture 10: Federal Open Market Committee, Federal Reserve Act, Jerome H. Powell

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Lecture 10: Monetary Policy
Key Principle: If supply of something goes up, the price goes down
Monetary Policy
Monetary Policysubset of economic policy; any policy designed to promote economic
health of country through the supply of money
o Key tool = interest rates
Interestprice you pay to borrow money
Federal Reserve (The Fed)US central banklargely coordinated government
authority that oversees interest rates, money supply, & the banking system
US was late to add a central bank
o In 1907 the stock market dropped and there was a run on the banks where people
wanted their money
o Banks didn’t have the money on hand because they loaned it
o There was nobody to loan them out money, so people now warm to the idea of a
central bank for this situation
Not politically popular for bankers to develop the central bank (like JP Morgan), but they
did in private
Federal Reserve Act (1913)officially establish the Federal Reserve as the central bank
of the US; also set up 12 regional banks
o Missouri actually has 2 of the regional banks because senator wouldn’t vote unless
they got them
The Fed has 4 tiers
o Board of Governorsthe top of the Fed; set monetary policy
7 people nominated by the president and confirmed by the Senate
Serve staggered 14 year terms and can't be removed for political reasons
This keeps them politically independent and not always pumping money into
the economy
Jerome Powell—current chair of the Fed, doesn’t have to worry about
presidential critiques
Trump wants him to lower interest rates to make the economy appear to be
Currently only 5 people; 2 still waiting on confirmation
Need majority of current board to pass policy
Often from academia or finance
Can't be officer, director, or stockholder of any current bank
o Federal Open Market Committeeunder the Board of Governors, made of the
Board of Governors & 5 regional presidents
Rotates which regional presidents
o 12 Regional Banksresponsible for the 'nitty gritty' including check clearing, loans,
& moving currency
o Member Banksbanks people do business with
Dual MandateFed is tasked with both promoting stable prices & full employment
o Hard to do both at once
o Fed used interest rates; doesn’t actually control them but guides them with 4 tools
Discount rate
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