Fed Goal#1:PriceStabilityThe figure shows CPlinflation in the United StatesnualinflationrateSince rising prices erode the16%value of money as a medium14of exchange and a store of1210value, policymakers in most8countriespursueprice6stability as a primary goal.42After the high inflation of theo1970s, then Fed chairman19671972197719821987199219972002200720129571962195Paul Volcker made fighting-4inflation his top policy goal.To this day, price stabilityremains a key policy goal ofFigure15.1The inflation rate, January1952-June2013the Fed.@2015PearsonEducation.lnc
© 2015 Pearson Education, Inc. 6 Fed Goal #1: Price Stability The figure shows CPI inflation in the United States. Since rising prices erode the value of money as a medium of exchange and a store of value, policymakers in most countries pursue price stability as a primary goal. After the high inflation of the 1970s, then Fed chairman Paul Volcker made fighting inflation his top policy goal. To this day, price stability remains a key policy goal of the Fed. The inflation rate, January 1952-June 2013 Figure 15.1
FedGoal#2:HighEmploymentAt the end of World War Il, Congress passed the Employment Act of1946, which stated that it was the:“"responsibility of the Federal government...tofoster and promote...conditions under which there will be afforded useful employment, folthose able, willing, and seeking to work, and to promote maximumemployment, production, and purchasing power."Thus price stability and high employment are often referred to as thedualmandateoftheFed@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 7 Fed Goal #2: High Employment At the end of World War II, Congress passed the Employment Act of 1946, which stated that it was the: “responsibility of the Federal government. to foster and promote. conditions under which there will be afforded useful employment, for those able, willing, and seeking to work, and to promote maximum employment, production, and purchasing power.” Thus price stability and high employment are often referred to as the dual mandate of the Fed
Fed Goal #3:Stability of Financial Markets and InstitutionsStable and efficient financial markets are essential to a growingeconomy.The Fed makes funds available to banks in times of crisis, ensuringconfidenceinthosebanks.In 2008,theFedtemporarily made these discountloans availableto investment banks also, in order to ease their liquidity problems@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 8 Fed Goal #3: Stability of Financial Markets and Institutions Stable and efficient financial markets are essential to a growing economy. The Fed makes funds available to banks in times of crisis, ensuring confidence in those banks. • In 2008, the Fed temporarily made these discount loans available to investment banks also, in order to ease their liquidity problems
FedGoal#4:EconomicGrowthStable economic growth encourages long-run investment, which isitselfnecessaryforgrowth.. It is not clear to what extent the Fed can really encourage long-runinvestment,beyond meeting the previous three goals.Congressand the President may be in a better position to address this goal.@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 9 Fed Goal #4: Economic Growth Stable economic growth encourages long-run investment, which is itself necessary for growth. • It is not clear to what extent the Fed can really encourage long-run investment, beyond meeting the previous three goals. Congress and the President may be in a better position to address this goal
TheMoneyMarketand theFed'sChoiceof MonetaryPolicyTargets15.2LEARNINGOBJECTIVEDescribetheFederal Reserve's monetarypolicytargetsand explainhowexpansionaryand contractionarymonetarypoliciesaffecttheinterestrate10@2015PearsonEducafion,lnc
LEARNING OBJECTIVE © 2015 Pearson Education, Inc. 10 The Money Market and the Fed’s Choice of Monetary Policy Targets 15.2 Describe the Federal Reserve’s monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate