The Federal Reserve System The central bank of the United States responsible for regulating the banking industry Controlled by a 7-member board of governors who are appointed by the president and confirmed by the Senate to serve 14-year terms Composed of 12 district banks and 25 branch banks District banks are owned by commercial banks that are members of the Federal Reserve system Main function is to regulate the nation’s money supply by controlling bank reserves requirements, regulating the discount rate, and running open-market operations Copyright © Cengage Learning. All rights reserved

Federal Reserve System Copyright © Cengage Learning. All rights reserved

The Federal Reserve System (cont’d) Regulation of reserve requirements Reserve requirement—the percentage of its deposits a bank must retain, either in its own vault or on deposit with its Federal Reserve District Bank More required reserves = less money in circulation Less required reserves = more money in circulation to stimulate the economy Copyright © Cengage Learning. All rights reserved

The Federal Reserve System (cont’d) Regulation of the discount rate Discount rate—the interest rate the Federal Reserve System charges for loans to its member banks Lower loan rates allow banks to lend more and stimulate the economy Higher rates slow the economy and check inflation Copyright © Cengage Learning. All rights reserved

The Federal Reserve System (cont’d) Open-market operations The buying and selling of U.S. government securities by the Federal Reserve System for the purpose of controlling the supply of money To reduce the money supply, the Fed sells government securities on the open market to take money out of circulation To increase the money supply, the Fed buys government securities Copyright © Cengage Learning. All rights reserved

The Federal Reserve System (cont’d) Other Fed responsibilities Serving as the U.S. government bank Clearing checks and electronic transfers of funds between banks Inspection and replacement of worn and unfit currency Selective credit controls Truth-in-Lending Act enforcement Stock purchase margin requirements Copyright © Cengage Learning. All rights reserved

Controlling the Money Supply and the Economy Copyright © Cengage Learning. All rights reserved