FEDERAL RESERVE SYSTEM CH 24.2

Structure and Organization Federal Reserve System (FED) = central bank of the US It is the bank for banks – local banks borrow money from the FED Established 1913 US divided into 12 Federal Reserve Districts – each with 1 main Fed. Res. Bank and most also have branch banks

Federally chartered commercial banks must be members of the FED; state chartered banks may join Member banks buy stock in the FED and earn dividends from it A Board of Governors (7) is appointed by the President and he selects one to chair the board for a 4 year term. The Board of Governors is supposed to be independent of the President and Congress - Without political pressure, economic decisions can be made freely in the countries best interest.

Officials of the district banks serve on the FEDs advisory councils which keep the FED informed of: - economic conditions within each district - financial institutions - issues related to consumer loans Federal Open Market Committee (FOMC) is the FEDs major policy making group. makes decisions that affect the economy as a whole by manipulating/controlling the money supply

Function of the FED The FED oversees most large commercial banks. It can block a merger between banks if the merger would lessen competition. Oversees the international business of American banks and foreign banks that operate in this country. Enforces laws that deal with consumer borrowing; creates laws that require lenders to spell out the details of a loan before a consumer borrows

Acts as the government’s bank Acts as the government’s bank. Government deposits revenues in the FED and withdraws it to buy goods. Sells U.S. government bonds and Treasury bills, which the government uses to borrow money. Issues the nation’s currency. Government agencies produce the money, but the FED controls its circulation.

Monetary Policy Regulating/Controlling the amount of money in circulation. Accomplished through raising or decreasing interest rates. The Federal Reserve (FED) is in control of monetary policy. Lower interest rates = cheaper loans(borrowing money) = economic expansion (speed up the economy) Higher interest rates = more expensive loans = economic contraction FED manipulates the money supply 3 ways – Discount rate, reserve requirement and open market operations

Discount Rate: Prime rate that banks can borrow money from the FED Discount Rate: Prime rate that banks can borrow money from the FED. Lower rate – encourages banks to borrow and lower their own rates = stimulates the economy Reserve Requirements: Percentage of deposits that banks must hold. Banks are free to loan out money that is not on reserve leading to expansion. Open Market Operations – purchase and sale of US gov’t bonds and Treasury Bills Buying bonds = gives investors $ = increases $ supply

Loose and Tight Money Loose Money Tight Money Easy to borrow Consumers buy more Business Expansion Employment increases Spending increases This can lead to inflation Tight Money Difficult to borrow Consumers buy less No business expansion Unemployment increases Production decreases This can lead to a recession