Standard SSEMA2- Explain the role and function of the Federal reserve

Federal Reserve Created in 1913 as the nation’s first true central bank Central bank: bank that can lend to other banks in times of need

Purpose of the Federal Reserve They regulate how much money is flowing in the nation’s economy at any point in time. This control of the money supply is called monetary policy. It is completely independent of the executive and legislative branches.

Regional District Banks Organization Board of Governors FOMC Regional District Banks Member Banks

Board of Governors Elected by the President and approved by the Senate They serve 14 year terms and a new member is elected every 7 years Ben Bernanke is the chairman

Federal Open Market Committee This part of the Fed is responsible for overseeing open market operations ( buying and sell of US treasury bond)

District banks There are 12 district banks who accept the other banks deposits and make loans to banks

Member Banks Member banks: privately owned banks who own shares of stocks in the Federal Reserve System These banks are governed by the Fed. The Fed

Monetary Policy This is how the Fed controls the money supply and it can also make loans to member banks Money Supply= deflation and falling production Money Supply = Inflation

Tools of Monetary Policy Open Market Operations Changes in the Discount Rate Changes in the Reserve Requirement

Open Market Operations The Fed sells or buys US government securities (bonds) to influence the money supply.

Changes in Discount Rate The discount rate is the interest the Federal Reserve charges on its loans to banks. Fed fund rate: Rate banks charge each other to borrow.

Reserve Requirement This is the minimum percentage of deposits that banks must keep on reserve to back up the checking accounts.

Money Policy Easy/Loose Money Policy: 1. Increase the Money supply 2. Decrease interest rates 3. During Recession/Contraction Tight Money Policy: 1. Decrease Money Supply 2. Increase Interest Rates 3. During Expansion/ controlled growth

Effects of Monetary Policy Controls Inflation Control Interest Rates Create jobs Control Credit