Scott Wolla, Ph.D.Senior Economic Education SpecialistFederal Reserve Bank of St. Louisscott.a.wolla@stls.frb.org

FOMC, Monetary Policy, and the Fed

The views expressed here do not reflect the official positions of the Federal Reserve System or the Federal Reserve Bank of St. Louis.

Review

What are the types of unemployment?• Give an example of each type

What is the dual mandate?

What is inflation?

What is deflation?

What is disinflation?

What is the Fed’s inflation target?

What is maximum employment?

What is the FOMC?

Federal Open Market Committee (FOMC)

The Federal Reserve's chief body for conducting monetary policy.

Monetary policy

Central bank actions involving the use of interest rate or money supply tools to achieve such goals as maximum employment and stable prices.

Federal Open Market Committee (FOMC)

Committee = 12 Reserve Bank Presidents + 7 Governors* = 19

Voting = 5 Reserve Bank Presidents + 7 Governors* = 12*Currently there are four open positions.

The Board of Governors Seven Governors at the Board of Governors

Federal Open Market Committee (FOMC)

Has 12 voting members• 7 members of the Board of Governors• President of the New York Federal Reserve• 4 Reserve Bank Presidents on a rotating basis

Monetary Policy & the FOMC

Year

2016 Boston Cleveland St. Louis Kansas City

2017 Philadelphia Chicago Dallas Minneapolis

2018 Richmond Cleveland Atlanta San Francisco

2019 Boston Chicago St. Louis Kansas City

The Federal Reserve's dual mandate is to promote maximum employment and price stability.

The FOMC’s inflation target is 2 percent*

* In the longer run. For more info: http://www.federalreserve.gov/faqs/money_12848.htm

How does the Fed define “price stability?”

Monetary Policy & the FOMC

The FOMC meets eight times a year.

The FOMC Press ReleaseJune 13, 2018

https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm

Press ConferenceFOMC Chair Jerome Powell

1. For each period, the median is the middle projection when the projections are arranged from lowest to highest2. The central tendency excludes the three highest and three lowest projections for each variable in each year.3. The range for a variable in a given year includes all participants’ projections, from lowest to highest, for that variable in that year.

Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents

June 13, 2018

The Big Three: Gross Domestic Product

Gross domestic product (GDP)

The total market value, expressed in dollars, of all final goods and services produced in an economy in a given year.

Guesses?

2018 Q1: $19.96 Trillion

Gross Domestic Product

2018 Q1: $19.96 Trillion

Real Gross Domestic Product

3.1% 2017: Q23.2% 2017: Q32.9% 2017: Q42.2% 2018: Q1

3.5%1947 - 2007

1.5%, 2.2%

FOMC Projections, June 13, 2018Change in Real GDP

Projections for economic growth may be interpreted as estimates of the economy’s normal or trend rate of growth over the longer run.

The lightly shaded areas represent the ranges of the projections of policymakers. The dark shaded areas represent the central tendency that excludes the three highest and three lowest projections for each variable in each year or period. The solid red line depicts the median projection in each period for each variable.

2.8 %2.4%

2.0 % 1.8 %

The Big Three: Unemployment Rate

UnemploymentA condition where people at least 16 years old are without jobsand actively seeking work.

Unemployment rateThe percentage of the labor force that is willing and able to work, does not currently have a job, and is actively looking for employment.

Guesses?

May 2018: 3.8%

Unemployment (blue) with Recession Bars 3.8% (May, 2018)Natural Rate of Unemployment (red) 4.7% (Q2, 2018)

Longer-run projections for unemployment may be interpreted as estimates of the economy’s normal unemployment rate over the longer run.

FOMC Projections, June 13, 2018Unemployment Rate

The lightly shaded areas represent the ranges of the projections of policymakers. The dark shaded areas represent the central tendency that excludes the three highest and three lowest projections for each variable in each year or period. The solid red line depicts the median projection in each period for each variable.

3.6 % 3.5 % 3.5 %

4.5 %

The Big Three: Inflation

Inflation

A general, sustained upward movement of prices for goods and services in an economy.

Guesses?

May 2018: 2.7% (CPI)

April 2018: 2.0% (PCE)

Inflation Rate Consumer Price Index (CPI) is Blue

Personal Consumptions Expenditures (PCE) is Red2.7%

2.0%

April 2012

February 2017

Inflation Rate Consumer Price Index (CPI) is Blue

Core CPI is Red2.7%

2.2%

The longer-run projection shown for inflation is the rate of inflation judged to be most consistent with the Federal Reserve’s dual mandate.

FOMC Projections, March 21, 2018Inflation Rate

The lightly shaded areas represent the ranges of the projections of policymakers. The dark shaded areas represent the central tendency that excludes the three highest and three lowest projections for each variable in each year or period. The solid red line depicts the median projection in each period for each variable.

2.1 %2.0 %

2.1 %2.1 %

The Federal Reserve's dual mandate is to promote maximum employment and price stability.

Paragraph 1: Recent economic developments

Paragraph 2: Goals and outlook

Paragraph 3: Policy decision

Paragraph 4: Decision process and forward guidance

Paragraph 5: Voting record

Risks to the economic outlook appear roughly balanced.

The stance of monetary policy remains accommodative...

…inflation near the Committee's symmetric 2 percent objective over the medium term

Key Phrases

July 1954 to presentCurrent Target: 1.75 – 2.00 percent

The FOMC kept the Federal Funds Rate in a 0 - 0.25% target range from

December 16, 2008 – December 16, 2105

Each shaded circle indicates the value of an individual participant’s judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run.

2.4 % 3.1 % 3.4 % 2.9 %

Monetary Policy Expansionary Contractionary1. Open Market Operations – Buying and selling government securities to influence money supply, credit, and interest rates.• Federal Funds Rate – The interest rate

banks pay when they borrow from other banks.

Buy bonds in the open market

• Federal Funds rate decreases

Sell bonds in the open market

• Federal Funds rate increases

2. Discount Rate – The interest rate banks pay when they borrow from the Federal Reserve

Decrease Discount Rate

Increase Discount Rate

3. Reserve Requirement – Portion of deposits banks must hold in Reserve in Federal Reserve Banks

Decrease Reserve Requirement

Increase Reserve Requirement

4. Interest on Reserves – Interest rate paid on required and excess reserves by Fed to banks.

Decrease Interest on Reserves

Increase Interest on Reserves

Banks make and take loans too!

Bank reserves: Currency held by banks in their vaults plus their deposits at Federal Reserve Banks.

• Required reserves: Funds that a depository institution must hold in reserve against specified deposits as vault cash or deposits with Federal Reserve Banks.

• Excess reserves: Amount of funds held by a depository institution in its account at a Federal Reserve Bank in excess of its required reserve balance and its contractual clearing balance.

Federal funds market: The market in which banks can borrow or lend reserves, allowing banks temporarily short of their required reserves to borrow from banks that have excess reserves.

Federal funds rate: The interest rate at which a depository institution lends funds that are immediately available to another depository institution overnight.

Monetary policy: The actions of a central bank to influence the cost and availability of money and credit to achieve the national economic goals.

1. Discount rate: The interest rate charged by the Federal Reserve to banks for loans obtained through the Fed's discount window.

Monetary policy: The actions of a central bank to influence the cost and availability of money and credit to achieve the national economic goals.

1. Discount rate: The interest rate charged by the Federal Reserve to banks for loans obtained through the Fed's discount window.

2. Reserve requirements: Funds that Banks must hold in cash, either in their vaults or on deposit at a Reserve Bank.

3. Open market operations: The buying and selling of government securities through primary dealers by the Federal Reserve in order to influence the money supply

4. Interest on Reserves: Interest paid by Federal Reserve banks on required and excess reserves held by banks.

The Money Market

Money Demand (MD) is downward sloping because people will demand a greater quantity at lower interest rates

Money Supply (MS) is vertical because the supply is controlled by the Fed.

Interest rates affect aggregate demand

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Equilibrium in the money marketThe effect on the interest rate when the Fed increases

the money supply

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Equilibrium in the money market

The effect on the interest rate when the Fed decreases the money supply

Assumes a scarcity of reserves.

For example, the current IOER is set at 1.95. If banks can earn 1.95% leaving money in their Fed account, they won't have an incentive to lend it out below that rate.

https://www.newyorkfed.org/newsevents/speeches/2017/log170518

However, some financial institutions cannot earn interest on reserves, weak leads to a "leaky floor"

Overnight reverse repurchase agreement facility provides a firm floor.

Expansionary

Lower the Fed Funds Target

Contractionary

Raise the Fed Funds Target Rate

FREE Classroom Resources!http://www.stlouisfed.org/education

Questions?

Scott WollaSenior Economic Education SpecialistFederal Reserve Bank of St. Louisscott.a.wolla@stls.frb.org314-444-8624

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Expansionary monetary policy in the AD-AS model

•The Fed conducts expansionary monetary policy when it takes actions to decrease interest rates to increase real GDP.• This works because

decreases in interest rates raise consumption, investment, and net exports.

The Fed would take this action when short-run equilibrium real GDP was below potential real GDP.• The increase in aggregate demand encourages increased employment,

one of the Fed’s primary goals.

•Monetary policy• Figure 17.7a

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Contractionary monetary policy in the AD-AS model

•Sometimes the economy may be producing abovepotential GDP.• In that case, the Fed may

perform contractionarymonetary policy: increasing interest rates to reduce inflation.

•Why would the Fed intentionally reduce real GDP?

• The Fed is mostly concerned with long-run growth. If it determines that inflation is a danger to long-run growth, it can contract the money supply in order to discourage inflation, i.e. encouraging price stability.

•Monetary policy• Figure 17.7b

Trivia Night?

Trivia Night Fed Questions

• The Board of Governors has how many members (when all seats are filled)?

Answer: 7

• The FOMC has how many voting members?

Trivia Night Fed Questions

Answer: 12• Seven members of the Board of Governors• President of the New York Federal Reserve• Four Reserve Bank Presidents on a rotating basis

Trivia Night Fed Questions

Year

2015 Richmond Chicago Atlanta San Francisco

2016 Boston Cleveland St. Louis Kansas City

2017 Philadelphia Chicago Dallas Minneapolis

2018 Richmond Cleveland Atlanta San Francisco

Trivia Night Fed Questions

• What are the three traditional tools of monetary policy?

1. Open Market Operations2. Discount Rate3. Reserve Requirements

Bonus:4. Interest on Reserves

• How many Federal Reserve districts are there?

Trivia Night Fed Questions

Answer: 12

Trivia Night Fed Questions

• What is the only state is with two Federal Reserve District Banks?

Trivia Night Fed Questions

Answer: Missouri, with banks in St. Louis and Kansas City.

Trivia Night Fed Questions

Trivia Night Fed Questions

• How has the Federal Reserve System dealt with changing population patterns within the district borders?

Answer: Some districts have several branches.

Federal Reserve Branch city, by District:(4) Cincinnati, Pittsburgh (5) Baltimore, Charlotte (6) Birmingham, Jacksonville, Miami, Nashville, New Orleans (7) Detroit (8) Little Rock, Louisville, Memphis (9) Helena (10) Denver, Oklahoma City, Omaha (11) El Paso, Houston, San Antonio (12) Los Angeles, Portland, Salt Lake City, Seattle

Trivia Night Fed Questions

• In what Federal Reserve district is the Federal Reserve Bank of St. Louis?

Trivia Night Fed Questions

Answer: 8

Trivia Night Fed Questions

• Who is the current Chair of the Federal Reserve Board of Governors of the Federal Reserve System?

Trivia Night Fed Questions

Answer: Jerome H. Powell

Trivia Night Fed Questions

• Who is the President of the Federal Reserve Bank of St. Louis?

Trivia Night Fed Questions

Answer: Dr. James Bullard

Trivia Night Fed Questions

Per Capita Real GDP For the U.S.

8

8.5

9

9.5

10

10.5

11

11.5

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Trend: 2.2%

Log of GDP per Capita in 2009 USD (1901 to 2014)

Sources: BEA and Historical Statistics of the United States/Haver

Real GDP, Post-WWII

7

7.5

8

8.5

9

9.5

10

10.5

1947 1957 1967 1977 1987 1997 2007

Trend: 3.3%

Log of GDP in Billions of 2009 USD (Q1 1947 to Q3 2015)

Sources: BEA/FRED

Real GDP, Recent History

9.4

9.45

9.5

9.55

9.6

9.65

9.7

9.75

9.8

9.85

9.9

2007 2008 2009 2010 2011 2012 2013 2014 2015

Long-Run Trend:3.3%

Post-RecessionTrend: 2.1%

Log of GDP in Billions of 2009 USD

Sources: BEA/FRED