Monetary Policy and the Federal Reserve

Study Notes

Jacob and Adriene discuss monetary policy and the influence of Janet Yellen, the Federal Reserve Chair.
The Federal Reserve is the central bank of the United States, responsible for regulating commercial banks and conducting monetary policy.
Monetary policy involves increasing or decreasing the money supply to speed up or slow down the economy.
Interest rates are the price of borrowing money, and the Federal Reserve manipulates them by changing the money supply.
When the Federal Reserve increases the money supply, interest rates decrease, leading to more borrowing and spending, known as expansionary monetary policy.
When the Federal Reserve decreases the money supply, interest rates increase, leading to less borrowing and spending, known as contractionary monetary policy.
Examples of the use of monetary policy include the U.S. economy during the Dot Com bust and 9-11, and during high inflation in the late 1970s.
The Fed's failure to provide emergency loans during The Great Depression led to widespread bank failures and prolonged the economic downturn.
The Federal Reserve can change the money supply through fractional reserve banking, the discount rate, or open market operations.
During the 2008 financial crisis, the Fed used open market operations and quantitative easing to increase the money supply and decrease interest rates.
Milton Friedman noted that inflation is a monetary phenomenon, leading to worries about massive inflation from the Fed's monetary stimulus since 2008.
Banks hold excess reserves, which has prevented the money from getting into the economy and causing inflation.
Economists believe that monetary policy is more effective for garden variety fluctuations due to its quick implementation and exclusive focus on the economy.- In a severe economic downturn, fiscal policy can be more effective than in normal times.
The United States implemented both monetary and fiscal policies during the 2008 financial crisis.
Developed countries have worked to keep their central banks independent from politics to ensure effective monetary policy.
Central bank autonomy allows for stable economic conditions and minimal side effects.
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