Federal Reserve: What The Central Bank Can Do
Late on Friday, after Federal Reserve Chairman Ben Bernanke delivered a speech in Jackson Hole, WY, my friend "T" called me and said: "I guess I should have learned about the Federal Reserve, but I was an English major, so can you tell what the Fed is supposed to do and what the heck Bernanke said today?"
The question inspired my segment with CBS3 this morning--Fed Decoder Rings are on order!
Here's a Fed cheat sheet and a quick overview of what Bernanke said:
The Federal Reserve was created in 1913 with 3 basic goals:
- To create sustainable economic growth
- To promote full employment
- To provide stability of prices
- Buy more government or mortgage bonds: when the Fed buys long-term bonds, it drives down long-term interest rates; making it easier for people and companies to borrow; which in turn stimulates the economy by encouraging more borrowing and spending. One pesky issue: to buy more assets, the Fed has to print more money, which could lead to inflation.
- Announce that rates will stay low: the Fed could change its language from the murky "extended period" to a certain date, provided that certain economic conditions don't change.
- Lower the Fed's interest rate for banks: when banks keep their money at the Fed, the Fed pays them interest -- 0.25 percent right now. The Fed could drop the rate to zero, which might encourage banks to do something else with thee money, like LEND IT!
