The Federal Reserve and Monetary Policy Chapter 16

Roots of the FED – Central Bank

History of the FED: The Federal Reserve System Several economic depressions of the 1800 and 1900’s caused American’s to urge the government for help. Woodrow Wilson responded by signing the Federal Reserve Act in 1913.

Creating the Fed Central bank—a nation’s monetary authority Section 1 - The Federal Reserve System Creating the Fed Central bank—a nation’s monetary authority monetary means “relating to money” Federal Reserve System—central bank of the U.S., called the Fed independent organization within government; established 1913

The Federal Reserve and Monetary Policy What the Fed Does Monetary policy includes all the Federal Reserve actions that change the money supply in order to influence the economy. Fight Inflation Control interest rates Lend money to banks Inspect banks Setting Monetary Policy Inspect currency

Duties of a Central Bank Most countries have a central bank- oversees banking system Holding Reserves: reserves set aside for loans from the banks funds Assuring Stability: in national banking and monetary system Control the way money is circulated Supervise banks Lending Money: unlike other banks it lends without the purpose of making money. To serve private banks rather than individuals.

The Duties of the Fed Fed uses regulation to protect bank customers, borrowers Banking services for private banks and government include holding deposits, transferring funds, making loans Helps finance wars, stabilize economy in national emergencies Regulates money supply; distributes currency— coins and paper money

The Structure of the Fed Fed not a single national bank; has national and regional structure has some independence from political influence; accountable to Congress

The Structure of the Fed Board of Governors—sets policy; supervises operations of the Fed chairman is most influential member and spokesperson Ben Bernanke 12 district banks carry out policy; serve as central bank for regions Member banks: all nationally-chartered banks; state banks may apply must buy district bank stock; cannot sell in open market

The Structure of the Fed Federal Open Market Committee—supervises government security sales Federal Advisory Council—represents commercial banking industry Consumer Advisory Council—advises on consumer protection laws on borrowing Thrift Institutions Advisory Council—needs of savings institutions thrifts not regulated by Fed; must meet reserve requirements; may borrow