| Course | FIN-3310 Financial Institutions and Markets |
|---|---|
| Module | Module 3 |
| Paper type | Module 3 written assignment: the Federal Reserve and monetary policy |
| Length | About 643 words, 5 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | B.S.B.A. in Finance |
| Updated | October 2026 |
Free sample paper for FIN 3310 Module 3
Steering With a Floor: How the Federal Reserve Sets Rates and What a Taylor Rule Suggests
Student Name
B.S.B.A. in Finance, Thomas Edison State University
FIN-3310: Financial Institutions and Markets
Mentor Name
Month Day, Year
Steering With a Floor: How the Federal Reserve Sets Rates and What a Taylor Rule Suggests
Structure and Goals
Three parts make up the Fed: a Washington board of seven governors, twelve regional Reserve Banks and the FOMC, the committee that sets policy. The FOMC has twelve voting members: the seven governors, the president of the New York Fed and four of the other eleven regional presidents on a rotating basis. By law the Fed pursues maximum employment and stable prices, and the FOMC reads the second as 2 percent inflation over time on the PCE price index (Mishkin & Eakins, 2018). The credit union's treasurer watches the gap between ten-year and three-month Treasury yields because Estrella and Mishkin (1998) found it a useful recession signal.
Policy Tools Under Ample Reserves
Before 2008, the Fed controlled the federal funds rate by adjusting the scarce supply of bank reserves through open market operations. Since the financial crisis, reserves have been plentiful, and the Fed now operates what it calls an ample-reserves regime. In this system, the main tools are administered rates:
When the FOMC raises its target range, it raises interest on reserve balances and the reverse repo rate by the same amount, and market rates follow.
| Tool | How it works |
|---|---|
| Rate paid on banks' reserves | No bank lends its reserves overnight below the rate the Fed already pays on them, which sets a floor under the federal funds rate |
| Overnight reverse repurchase facility | Money market funds and others can lend to the Fed overnight, extending the floor to institutions that cannot earn interest on reserves |
| Discount window | Banks can borrow from the Fed at the primary credit rate, which acts as a ceiling on short-term rates |
| Open market operations and the balance sheet | Purchases or runoff of Treasury and mortgage securities keep reserves ample and influence longer-term rates |
| Forward guidance | Statements about the likely path of policy shape expectations of future rates |
Transmission to Members
A rise in the federal funds rate passes through the financial system in steps. Short-term market rates rise almost immediately. The credit union's cost of funds rises as it raises rates on certificates to keep members' deposits, and money market funds compete for savers. Rates on new auto loans and adjustable-rate mortgages rise. Longer-term rates, such as fixed mortgage rates, move depending on whether markets expect the change to persist and what it implies for inflation. Higher rates reduce borrowing and spending, slow the economy and, over time, ease inflation. The full effect on inflation takes a year or more.
The Taylor Rule
Taylor (1993) proposed a simple rule that described Fed policy well in the late 1980s and early 1990s: the federal funds rate should equal the inflation rate plus an equilibrium real rate plus half the inflation gap plus half the output gap.
i = π + r* + 0.5(π − 2) + 0.5(output gap)
The two scenarios show how sensitive the rule is to the assumed equilibrium real rate, which cannot be observed directly. Estimates of that rate fell sharply after 2008, which is one reason the Fed treats the rule as a guide rather than a formula.
| Scenario | Inflation | Output gap | Equilibrium real rate | Rule rate |
|---|---|---|---|---|
| A: above-target inflation, mild slack | 3.0% | −1.0% | 2.0% | 3.0 + 2.0 + 0.5 − 0.5 = 5.0% |
| B: near-target inflation, economy at strength, lower neutral rate | 2.4% | +0.5% | 0.5% | 2.4 + 0.5 + 0.2 + 0.25 = 3.35% |
Implications for the Credit Union
For the treasurer, understanding the floor system means watching the FOMC's announcements of administered rates rather than reserve quantities, and understanding the Taylor rule means anticipating when inflation and employment data make a change likely. A credit union funded by short-term deposits and lending at fixed rates gains when rates fall and loses when they rise quickly, so the Fed's path directly shapes its margin.
References
Estrella, A., & Mishkin, F. S. (1998). Predicting U.S. recessions: Financial variables as leading indicators. Review of Economics and Statistics, 80(1), 45-61. https://doi.org/10.1162/003465398557320
Mishkin, F. S., & Eakins, S. G. (2018). Financial markets and institutions (9th ed.). Pearson.
Taylor, J. B. (1993). Discretion versus policy rules in practice. Carnegie-Rochester Conference Series on Public Policy, 39, 195-214. https://doi.org/10.1016/0167-2231(93)90009-L
FIN 3310 Module 3 instructions, in plain terms
Monetary policy is midterm material, so treat this paper as exam practice too. Expect questions on the Federal Reserve's structure and goals, its tools, how policy affects the economy and policy rules such as the Taylor rule. Because the textbook edition predates some changes in the Fed's operating framework, explaining the ample-reserves system earns credit. Estrella and Mishkin's work on the yield curve connects policy to recession risk. The credit union is a composite. Expect questions on the Federal Reserve's tools, including interest on reserves and open market operations, and a Taylor rule calculation.
How the FIN 3310 Module 3 example is put together
The paper sets out the Fed's structure and dual mandate first. A table describes each policy tool under the ample-reserves regime, followed by a short explanation of how a rate increase is implemented. The transmission section traces a policy change step by step to the credit union's deposit and loan rates. A second table computes the Taylor rule under two scenarios and explains the sensitivity to the equilibrium real rate, and the final section connects the analysis to the credit union's interest margin. The Taylor rule result is compared with the actual policy rate, and the gap is explained. A short section explains how the Fed's tools changed after 2008.
Where the marks sit in the FIN 3310 Module 3 rubric
The Fed paper is graded on tools, transmission and a worked Taylor rule. Credit goes to an accurate sketch of the Fed and its goals, its tools explained correctly, transmission traced step by step and a Taylor rule worked and read. Showing awareness that the Fed's operating framework has changed since the crisis, and that policy rules depend on unobservable inputs, demonstrates the depth expected in a finance major's course. Mentors check the Taylor rule arithmetic and look for an explanation of why the Fed might deviate from it. Current data, with dates and sources, make the Taylor rule comparison credible. Papers that work the Taylor rule with current inflation and unemployment data, and compare the result with the actual federal funds target, show how the theory meets practice. Explaining why the two may differ, such as uncertainty about the neutral rate, adds depth.
Common FIN 3310 Module 3 mistakes, and how to avoid them
Monetary policy answers lose points for describing the Fed as setting rates by buying and selling securities to change scarce reserves, for confusing the discount rate with the federal funds rate and for applying the Taylor rule without stating its assumptions. Explain administered rates and the floor system. Trace transmission step by step. State each input to the Taylor rule and show how the result changes when the equilibrium rate changes. A free first sample of your own FIN-3310 Module 3 assignment is available on request. State the inflation and output gap figures you use and their dates before computing the rule.
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FIN 3310 Module 3 questions, answered
Where can I find a free FIN 3310 Module 3 sample paper?
The credit union paper above explains the Fed's structure, its ample-reserves tools, policy transmission and a Taylor rule under two scenarios.
How does the Fed set the federal funds rate today?
Chiefly through the rate it pays banks on reserves and its overnight reverse repo rate, which hold market rates up from below.
What is the Taylor rule?
A formula setting the policy rate equal to inflation plus an equilibrium real rate plus half the inflation gap and half the output gap.
What is the Federal Reserve's dual mandate?
Maximum employment and stable prices, with price stability defined as 2 percent inflation over the longer run.
Who votes on the FOMC?
The seven governors, the president of the New York Fed and four other regional bank presidents in rotation.