Oct 08, 2020

EconExtra: Three Reasons to Update your Monetary Policy Material

 

EconExtra is a series of posts that go beyond the textbook, relating current events and recent developments in economics to content standards, and providing resource suggestions to help you incorporate the current events into your lessons.

 

Issue/Event

There are three reasons to check your lessons on Monetary Policy (CEE Content Standard 10):

  • Policy has changed over the last ten years
  • The Fed’s long-term strategy around its dual mandate has changed slightly
  • The Fed is digging deep in its box of non-traditional tools (Section 13-3 of the Federal Reserve Act) to fight the economic impact of the pandemic.

 

The St. Louis Fed offered a session at the CEE conference last week tackling this very topic. They are offering a training session for teachers October 21 on the same topic: Monetary Policy in Ordinary and Extraordinary Times. You can register for this event here. The following is a guide to the topics and materials that will be covered in the training session. You can use these resources to bring yourself up to date and/or use them with your students.

Reason #1

Monetary Policy has changed since 2008. The first deviation from pre-2008 are the policies enacted to combat the Financial Crisis in 2008 and the period following it.   The St. Louis Fed’s August 2020 Page One Economics provides updated information, comparing the “limited-reserves framework” to the current “ample-reserves framework.” It explains the three programs used between 2008 and 2014 to influence long-term interest rates. You can draw from this to create a lesson, or assign it as the text for your students. This provides links to both the PDF or HTML format of the publication, as well as other related articles.

 

Reason #2

Chair Jerome Powell’s opening speech at the (virtual) Jackson Hole conference in August announced a change in the Federal Reserve’s long-term strategy regarding its dual mandate of aiming for full employment while managing inflation.Very low inflation and certainly deflation are not healthy for the economy, and the Fed’s has historically had a 2% inflation target.  Morning Brew does an excellent job of explaining this change. The bottom line is that over recent years, low levels of unemployment have not triggered inflation as had happened in the past.  Going forward, the Fed will allow inflation to rise above 2% for a given period, waiting for AVERAGE inflation rates to rise above 2% before acting to dampen it. In other words, it looks like we will be at low interest rates for a quite a while.

Here is a link to the actual Fed statement if you are interested in more detail.

 

Reason #3

“The Fed can lend but it cannot spend” is a quote attributed to Fed Chair Jerome Powell from this past spring. It comes up often when he is asked about the Fed’s actions during the Covid Crisis. The September 2020 Page One Economics discusses what the economy has been experiencing and addresses exactly what the Fed has done to help during these difficult times. The graphics included in this publication are excellent, and many have interactive components that allow you to expand or contract the range of time (the X-axis) to look at the movement in indicators across different periods of time. As with the material recommended funder “Reason #1,” you could draw from this material for your lesson or assign the reading directly to your students.

 

Assignment idea:

Have your students read the September Page One Economics article on the Fed’s response to the Covid Crisis and then listen to the September 4 NPR interview of Federal Reserve Chair Jerome Powell (or read the transcript of it). Students can then answer some questions about it. Questions might look something like the following:

 

  • What was the first policy step taken by the Federal Reserve Bank in March, and why did they take that step?

 

  • How successful do you feel the Federal Reserve has been in warding off an even worse recession? Which sectors of the economy do you think their policies are helping?

 

  • What non-monetary policies/actions does Chair Powell believe are necessary to pull the economy out of this crisis?

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