Monetary Policy - The Economic Lowdown Video Series
The Federal Reserve, “the Fed,” is the central bank of the United States. One of its important functions is to promote a strong U.S. economy. In fact, Congress has given the Fed two main goals: maximum employment and price stability. These videos explain how the Fed uses monetary policy to reach those goals.
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Monetary Policy, part 1: The Fed and the Dual Mandate
This segment explains how the Fed adjusts the target range for the federal funds rate to set off a chain of events in the economy. This chain of events eventually influences the decisions of consumers and businesses and moves the economy toward the Fed’s dual mandate goals of price stability and maximum employment.
Monetary Policy, part 2: Two Important Interest Rates in Monetary Policy Implementation
This segment explains how the Fed uses two important interest rates—the federal funds rate and the interest on reserve balances rate—to implement monetary policy. When banks lend funds to other banks from these accounts, they earn the federal funds rate. When banks hold funds in reserve balance accounts at the Fed, they earn the interest on reserve balances rate. But interest on reserve balances isn’t just about interest transactions; the Fed uses the interest on reserve balances rate to steer the federal funds rate.
Monetary Policy, part 3: Reservation Rate and Arbitrage
This segment explains that the interest on reserve balances rate acts as a reservation rate for banks, and explains how arbitrage ensures that it is an effective tool for steering the federal funds rate into the FOMC’s target.
Monetary Policy, part 4: The Fed in Action
This segment explains how the Fed moves the economy toward maximum employment and price stability by setting a target range for the federal funds rate, and how it then uses interest on reserve balances to steer the federal funds rate into the target range. These factors affect consumer and producer decisions and ultimately the level of employment and inflation, which promote a strong U.S. economy.
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