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Hello. I'm Dr. Michael McDonald.
I'm an associate
professor of finance at
Fairfield University in
Fairfeld, Connecticut,
and today I'd like
to talk to you
about the Fed, interest
rates, and inflation.
This is part of the
ongoing series of
case study talks here
at Henry Stewart Talks.
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The Federal Reserve isn't an
institution you
might have heard of,
but it's one of the most
important financial
regulators and
financial entities not only
in the US but in
the entire world.
The Federal Reserve or Fed is
the central bank of
the United States
and it was established in 1913.
It is a dual mandate.
What that means is it has
two objectives that
it has to fill.
These objectives are in
some ways conflicting
with one another,
so it has to balance
between them.
Specifically, the
Fed's goal is to
maximize employment, i.e.,
keep job growth strong while at
the same time ensuring
price stability.
In other words,
controlling inflation.
Why are these two things
at odds with one another?
Inflation typically is
strongest when the
economy is good.
In other words, when there's
lots of job growth going on.
Inflation is weakest, it's less of a
problem when the economy is weakest,
and so these two things
kind of are at odds
with one another.
When the economy is really
strong and really healthy,
it's the Fed's job to take away
the proverbial "punch bowl" to
stop inflation from
getting out of control.
When inflation isn't a problem
and the economy is weakening,
it's the Fed's job to get
things going again in
order to keep job growth
strong and keep employment up.
The Fed is structured
in a unique way.
It's a set of 12
regional banks that are
overseen by a Board
of Governors,
which has seven members
in Washington DC.
This seven member Board of
Governors is appointed
by the President.
But those 12 regional banks
also have members on the Fed.
This creates what we call
the FOMC or Federal
Open Market Committee.
This FOMC group sets
monetary policy in the US,
specifically, the Fed controls
interest rates within
the broader US economy.
The Fed operates
independently of any
other political entities,
but it is accountable
to Congress ultimately.
