Question of the Day (and Current Event too!): What Does the Federal Reserve Do?

Sep 17, 2014

Looking for a way to bring the Federal Reserve to life?  Ok, I admit this can be a dry topic to tackle while also being a very difficult one to explain to high school students or anyone for that matter.  So, when a teacher sent me a note today asking if I had some good resources about the Federal Reserve aside from the Fed websites, I put on my researcher’s hat and spent a few hours looking.  My goal:  to find a novel approach to this topic that could help supplement an educator’s existing lesson on the Fed.

As serendipity would have it, in the midst of my research I received an email alert about the Fed Chair Janet Yellen’s press conference today following the 2 day meeting of the Federal Open Market Committee (FOMC).  For those familiar with these sorts of things, watching paint dry can seem a more exciting alternative.  Ok, but when you consider that markets hang on every word from the Fed Chair’s mouth, it forces one to sit up and take notice.

So, how might I structure a supplement to your Federal Reserve lesson?  

  1. How about some background reading which is structured as a Q&A on the Federal Reserve from CNBC?  You might split the class in groups and have each group tackle one question from the article and then share out to the class.
  2. This background should help as you watch 4-5 minutes of the Fed Chair’s press conference which took place today (CSPAN video).   You might have students reflect on these questions prior to watching the press conference (and even stop the video to discuss these questions as Fed Chair Yellen addresses them):
    1. What is Federal Open Market Committee (FOMC)? To set monetary policy by reviewing economic data and adjusting policy to meet twin objective on employment and inflation
    2. What is monetary policy?  Control of the money supply through targeting of interest rates or asset purchases (bond buying which the Fed has been doing).
    3. How does the Fed set that policy?
      1. Sets Fed Funds rate which is the rate banks lend to each other on a very short-term basis (overnight).
      2. Open market operations (buying and selling of government bonds).  Fed has been buying bonds which has been increasing the money supply and keeping long-term interest rates low (technical term:  quantitative easing)
      3. Reserve requirements refer to the reserves that banks have to keep on hand against deposits made by their customers.  Increasing reserve requirements means banks will have less money available to lend to their customers and will slow the economy.
    4. What are objectives of the Fed in setting this policy?  Maximum sustainable employment and inflation rate target of 2%.
    5. What does the Federal Reserve believe is holding back the economy now?  Slack in the labor markets.
    6. Why do you think interest rates (which the Fed manages) matter so much to the economy?  Low interest rates intended to stimulate the economy.  For example, low interest rates can often stimulate the housing market as low interest rates on mortgages can make homes affordable for more people.

I hope this supplementary material is helpful!

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About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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