CHAPTER 16—THE FEDERAL RESERVE

Board of Governors… --directs operations of the Fed --7 full-time members appointed by the Pres—Pres. Appoints 1 person as chair --each members serves a 14 year term (terms arranged so there is 1 opening every 2 years)

Federal Open Market Committee— --meets about 13 times a year to decide the course of action that the Fed should take to control the money supply --committee made up of members of the Board of Gov., plus the president or VP of 5 federal reserve district banks (one is always from the Fed in NYC)—the four others rotate between the districts for 1 year terms

Federal Advisory Council (FAC) --12 members—each appointed by the member bank --meets with Board 4 times a year --provides feedback to the Fed Board on the overall health of the economy

Federal Reserve Bank— --each of the 12 Federal Reserve Banks are set up as a corporation owned by the member banks --each bank has a 9 member board of directors that supervise the bank

Member banks— --all national banks are required to become members of the Federal Reserve --State banks have OPTIONAL membership --to become a member bank…the bank must purchase stock in their district Fed. bank

Advantage of Fed membership? --as a stockholder, members may vote for 6 of 9 of the members on the board of directors --members receive dividends from stock --BUT…ALL banks may hold reserves at the Fed, ALL banks may borrow $$ from the Fed, ALL banks may clear checks through the Fed

Duties of the Fed… 1. MOST IMPORTANT!!!—control the growth of the money supply in order to determine the amount of money in circulation, which affects the amount of credit and business activity in the economy

2. Check clearing 3. Federal Government’s bank—Fed keeps track of fed. Government deposits and holds checking acct for the U.S. treasury 4. Fed lends money to Treasury and acts as financial advisor to fed. Govt.

5. Supervise member banks --Fed supervises and regulates member commercial banks --approves mergers of 2 or more banks --sets loan limits for member banks --examines books of member banks

6. Holds and sets reserve requirements --each of the 12 Fed. Reserve banks holds and sets reserve req. for member and nonmember banks in district (Fractional Reserve Banking System) 7. Supplying paper currency (NOT printing…that is the Bureau of Printing and Engraving…NOT part of the Fed Reserve.)

MONETARY POLICY… Involves changing the rate of growth of the supply of money to affect the amount of credit, and therefore, business activity in the economy LOOSE MONEY POLICY—credit is inexpensive to borrow, abundant Result of too much loose money policy: inflation

Tight money policy: credit is expensive to borrow and in short supply Result of too much tight money policy: recession Tools of monetary policy: 1. reserve requirement 2. discount rate 3. open market operations

Rates to be familiar with… 1. Discount rate…rate the Fed charges when banks borrow from the Fed (set by the Board of Governors) 1.00% 2. Federal funds rate…rate that banks charge each other when they borrow. (A TARGET rate is determined and managed through the supply and demand for loanable funds) target is .25-.50% 3. Prime rate…rate that banks charge their best business customers (highest of the three)