Assignment 7

Web Exercise I-)

Who's Running the Fed?

The Federal Reserve Bank, governed by the Board of Governors, has been named as the most powerful organization in the world. The decisions made by this group of individuals cause billions of dollars to be made or lost. But who are these people? The purpose of this exercise is to provide you with a little background biographical information about the members of the Board of Governors of the Federal Reserve.

Go to the Federal Reserve Board website to find out a little more about this powerful group charged with conducting monetary policy for the United States and then try to answer a few questions about them.

http://www.federalreserve.gov/bios/

  1. We all know that Alan Greenspan is Chairman of the Fed. But what is his educational background?
  2. How old is Chairman Greenspan?
  3. Who is the lone female member of the Board and what was her most recent work experience?
  4. Is there any minority representation on the Board? If so, provide some personal information about that person.

Web Exercise II-)

Learning Fed Operations 'In Plain English'

It's one thing to learn about the Federal Reserve in a standard textbook. And it can be quite confusing to study the Fed by relying on the web pages produced by the Fed itself. Thankfully, the St. Louis branch of the Federal Reserve put together an Internet site that explains the Fed in layman's terms and serves as a good complement to textbook explanations of Fed activities. In this Internet exercise, we will study parts of this site and work through some of the links and, in the process, learn a little bit about one of the largest (and most secretive) agencies of the U.S. government.

To begin, open the Federal Reserve Bank of St. Louis Web site and find the "In Plain English" link (found via its education section).

http://www.stlouisfed.org/publications/pleng/default.html

  1. At the opening page of the In Plain English site, click the "next" button. On this page, click the "next" button again. What three parts comprise the Federal Reserve?
  2. Now click on the History tab on the left. According to the St. Louis Fed, what event spurred the creation of the Fed in 1913?
  3. This section discusses the roles played by competing interests that had to be taken into consideration in the formulating the legislation that resulted in the Federal Reserve. What were the interests that required a "critical balancing act" on the part of legislators?
  4. Now click the next button to study the role played by the Fed's Board of Governors. According to this page, how many members comprise the Board and how long are their terms? Why are their terms staggered? What does the Board do, and what is considered its most important responsibility?
  5. Now click the next button to go to the page on Reserve Banks. What are the Reserve Banks, and why are they sometimes called "the banker's bank"? What groups comprise the Reserve Banks' main audiences?

6.  Now click the next button to go to the page on the Federal Open Market Committee, which is the Fed's chief monetary policymaking body. How is the FOMC comprised and how often does it meet?

7.  What are the three tools that the FOMC uses to influence the growth of the money supply?

  1. Is it true that the FOMC is "the organization that raises or lowers interest rates"?

9.  Now click next to study the Fed's regional structure. This section describes the role of the Fed's regional districts in the formulation (and implementation) of Fed policy. Look at the map. How many branch locations operate? Which region has the most branches? Which region has the fewest?

Web Exercise III-)

Mortgage Interest and the Economy

We’ve all noticed the headlines about mortgage rates being at 40-year lows. But what does that rate translate to economically? How does it impact us on a micro and macro level? The purpose of this exercise is to get you to think about some of the things, in this case mortgage rates, that you see in the popular press and how those things impact the economy. The following series of questions will require you to think about some of the connections between business activity and the economy and stretch your understanding of economics.

http://www.bankrate.com/brm/default.asp

  1. What is the average 30-year fixed mortgage rate?
  2. What impact do mortgage rates have on the economy?
  3. What other areas of consumer spending might be impacted by lower mortgage rates?
  4. What is the average home equity rate of interest?

In the news…

Fed Tries to Calm Markets

LEAD STORY-DATELINE: The Wall Street Journal, Tuesday August 12, 2003, p. A2.

For most of the past 50 years the Fed has indicated inflation was "too" high. Now, with inflation hovering at around 1%, the Fed views the economic situation as uncharted territory. However, Fed policy makers have failed to convince the market of that fact. The financial markets expect business as usual and interpreted the Fed's recent unwillingness to take additional drastic action to stimulate the economy as a sign that interest rates might be going up soon and the bond market erupted in turmoil.

Investors pushed bond yields higher in anticipation of a rate increase while the Fed struggled to draft an economic outlook statement designed to reflect its assessment of the inflation risk and the prospects of economic growth. Knowing the power of Fed comments, the statement has undergone multiple revisions and is still a "work in progress." The Fed's challenge is to convince the financial markets that its history of being aggressively proactive in fighting inflation will not interfere with the fledgling economic recovery.

  1. What is the primary tool of the Federal Reserve?
  2. What is the Fed funds rate?
  3. If the Fed lowers the target for the Fed funds rate, how does it accomplish lowering this rate?
  4. How does the Fed use interest rates to combat inflation?