The Federal Reserve System Organization

Creation of the Fed Central bank = a nation’s main monetary authority Duties of a central bank Holding reserves Assuring stability Lending money The Federal Reserve is the US Central Bank

Structure of the Fed The country is divided into 12 districts Each district has a district bank Milwaukee is in the 7th district Our district bank is in Chicago

Board of Governors Oversees the operations of the Federal Reserve Chairman is Ben Bernanke

7 members Chair Appointed by the president Confirmed by the Senate Geographic restrictions 14 year staggered terms No reappointment after serving a full term Oversees the Fed Sit on the FOMC Chair Appointed by president from among 7 governors Confirmed by Senate 4 year term Can be reappointed Acts as spokesman for monetary policy for the country

Federal Open Market Committee FOMC Controls the money supply

FOMC Duties Membership Makes key decisions about interest rates and the money supply Membership 4 District Bank Presidents serve rotating 1 year terms Board of Governors President of New York Federal Reserve Bank

Advisory Councils Each district has an advisory council Made up of bankers, business owners, and others Advises the district bank president on conditions within the district

Roles of the Federal Reserve Services to banks: Holds deposit accounts Processes checks Transfers funds Makes loans Regulates

Banker to the federal government Pays bills Sells government securities Distributes currency Manages the supply of money and credit

The Federal Reserve System Tools for controlling the money supply

Reserve Requirement Amount bank must hold in its vaults against the amount of checking account deposits This amount is called the required reserves It is expressed as a percentage All additional reserves, called excess reserves can be used to make loans Increasing the reserve requirement decreases the money supply Decreasing the reserve requirement increases the money supply

Discount Rate The interest rate charged by the Fed to lend money to banks An increase in the discount rate results in a decrease in the money supply Banks will borrow less and then have less to lend out A decrease in the discount rate results in an increase in the money supply Banks will borrow more and have more to lend out

http://www.youtube.com/watch?v=tOXpijd6t6k

Open Market Operations Buying and selling government securities Savings bonds Treasury notes, bills, and bonds Carried out by the New York Federal Reserve Bank Buying = increased money supply Selling = decreased money supply

://www.youtube.com/watch?v=jsatjEDNXj4

http://www.youtube.com/watch?v=274l3r4qMho

Impact of expansionary policy If economy is sluggish (falling GDP), demand increases, production will be stimulated and unemployment reduced If inflation is occurring due to cost-push factors and the economy is sluggish, the economy will be stimulated without increasing prices

Impact of contractionary policy Effective when GDP is increasing and there is inflation If economy is sluggish, it will make it worse If inflation is occurring because of cost-push factors, it will have little effect on prices