Section 4 money management lead-in

Money management provides for fiscal and monetary policy. Fiscal policy is government policy with regard to public spending, taxation and borrowing. Monetary policy is government policy with regard to the level of interest rates and the growth of money supply. Central Banks can either loosen or tighten both policies.

The control over money supply is an important task of any central bank: the Federal Reserve System (FED) in the United States, the Bank of England in the United Kingdom, the Bank of Japan in Japan etc. This task means targeting rates of money growth within which the central bank feels the nation’s best interests are served.

In the United States, interest rates are decided by the Federal Reserve. The Fed meets eight times a year to set short-term interest rate targets. During these meetings, the CPI and PPIs are significant factors in the Fed's decision.

Interest rates directly affect the credit market (loans) because higher interest rates make borrowing more costly. By changing interest rates, the Fed tries to achieve maximum employment, stable prices, and a good level growth. As interest rates drop, consumer spending increases, and this in turn stimulates economic growth.

The Fed is not a single bank. It is a system made up of twelve Federal Reserve banks, which are governed by a board of directors. The Board is appointed by the president of the USA with the approval of the Senate. The FED has three main tools with which it can influence the money supply: (1) open market operations; (2) discount rate policy; (3) reserve requirements.

The biggest customer of the Federal Reserve is one of the largest spenders in the world - the U.S. government. Similar to how you have a checking account at your local bank, the U.S. Treasury has a checking account with the Federal Reserve. All revenue generated by taxes and all outgoing government payments are handled through this account. Included in this service, the Fed sells and redeems government securities such as savings bonds and Treasury bills, notes and bonds.

The United States government issues several different kinds of bonds through the Bureau of the Public Debt, an agency U.S. Department of the Treasury. Treasury debt securities are classified according to their maturities: Treasury Bills have maturities of one year or less; Treasury Notes have maturities of two to ten years; Treasury Bonds have maturities greater than ten years.

Treasury Bonds, Bills, and Notes are all issued in face values of $1,000, though there are different purchase minimums for each type of security.

Investors often shorten the word Treasury to just the letter "T" when referring to these bonds. Thus, Treasury Bonds are known as T-Bonds, Treasury Notes are called T-Notes, and Treasury Bills are T-Bills.

Treasury Bills (T-bills) are the most marketable money market security. Their popularity is mainly due to their simplicity. T-bills are basically a way for the U.S. government to raise money from the public. T-bills are issued with 3 month, 6 month, and 1 year maturities. The biggest reason that T-Bills are so popular is because they are one of the few money market instruments that are affordable to the individual investors. T-bills are usually issued in denominations of $1,000, $5,000, $10,000, $25,000, $50,000, $100,000, and $1 million. Other positives are that T-bills (and all treasuries) are considered to be the safest investments because the U.S. government backs them. In fact, they are considered risk-free.