FED CHALLENGE

The College Fed Challenge competition challenges students to present their analysis of economic conditions and recommend an appropriate course for monetary policy.

Teams in the Fifth Federal Reserve District compete at regional competitions organized and hosted by participating colleges and universities.

The top team from each regional competition advances to participate in a semi-final competition round at the Federal Reserve Bank of Richmond.

The semi-final competition winner moves on to compete in the finalist competition at the Board of Governors in Washington, D.C.

Colleges and universities in North and South Carolina compete October 28th at Elon University in Elon, NC.

To register contact Jennifer Platania (jplatania@elon.edu) or Vitaliy Strohush (vstrohush@elon.edu).

Monetary policy is carried out by the Fed to counteract either actual or anticipated undesired changes in the economy.

If inflation is rising or inflationary pressures are brewing, the Fed will attempt to slow economic growth by raising interest rates.

If economic growth is stagnating then the Fed may try to give it a shot by lowering interest rates.

It is important to realize that the Fed only directly controls one out of many different interest rates.

The Fed has direct leverage over what is known as the Federal Funds rate.

The Fed Funds interest rate is directly linked to the amount of monetary reserves in the banking system.

To increase the Fed Funds rate, the Fed will drain reserves from the banking system by selling some of its inventory of government debt to banks.

To decrease the Fed Funds rate, the Fed will increase banking system reserves by purchasing some of the government debt present in the banks asset portfolio.

By changing the Fed Funds rate we assume that all other financial interest rates change by a similar magnitude and in the same direction.

In a nutshell, this is how Fed policy works.

The Fed is always monitoring the economy for undesirable future changes.

When the policy committee of the Fed, known as the Federal Open Market Committee (FOMC) decides that thinks look rough, they will initiate or continue either an expansionary or restrictive monetary policy.

With the new policy, the New York branch of the Fed rapidly begins a net purchase or sale of government debt in exchange with various banks in order to change the level of banking reserves and the Fed Funds rate.

Almost immediately, financial markets adjust other interest rates based on Fed policy.

The ultimate goal of the Fed is to alter the growth rate of aggregate demand and GDP.

In order to change economic growth rates, the key is to alter the longer term interest rates that significantly affect business and consumer borrowing.

Focusing on the business sector, changes in longer term interest rates will alter the level of business investment or the I component of GDP that is written as: GDP = C(Y - T) + I(r) + G + NX