Federal Reserve System

Federal Reserve System History Structure Roles & Responsibilities The Fed in Action Questions

Banking in the Early 1900s Financial disruptions Loss of faith in the banking system Bank panics & failures

Banking in the Early 1900s

Federal Reserve Act Signed into law in 1913 Created the Federal Reserve System “Central Bank” Independent within government

Our Nation’s Central Bank Mission: Promote the safety, soundness and stability of our nation’s financial system. Mandate: Promote maximum sustainable employment, stable prices and steady economic growth.

Structure of FRS Board of Governors 12 Regional Reserve Banks 7 Members (governors) Chairman 12 Regional Reserve Banks Federal Open Market Committee (FOMC) 7 Governors/5 Voting Presidents 8 times a year

Ben Bernanke

Board of Governors Fourteen Year Term Appointed by the President Confirmed by the Senate Ben S. Bernanke Donald L. Kohn Frederic S. Mishkin Susan B. Bies Vacant Kevin M. Warsh Randall S. Kroszner

Federal Reserve Banks

Roles of the Fed Conduct Monetary Policy Supervise Banks Provide Financial Services

Monetary Policy The process of managing money supply to achieve specific economic goals Expansionary Policy Increases business activity to grow economy Goal: Reduce unemployment (avoid recession) Contractionary Policy Decreases business activity to slow economy Goal: Curb inflation

Monetary Policy Economic Indicators Unemployment Housing starts Consumer Price Index Industrial production Bankruptcies Retail Sales Stock Market prices

Monetary Policy Three primary tools are available to the Federal Reserve to change the money supply Buy (or sell) government bonds in the open market and give money to the banks. Banks then have more money available to loan and can reduce their interest rates. At lower rates, consumers are more willing to borrow, and aggregate demand can increase * The buying a selling of government bonds is by far the most widely used tool of monetary policy.

Monetary Policy Three primary tools are available to the Federal Reserve to change the money supply Lower the short-term rate, the rate banks lend to one another overnight. When the Fed reduces the interest rate banks must pay to borrow from another bank, or the Fed, banks become more willing to borrow, to make money available for loans at lower interest rates. In this case, again, consumers are more willing to borrow and spend, increasing aggregate demand. * Adjustments to the short-term rate is the most widely known tool, and is monitored closely by the public and used as a signal of the Fed’s intentions for monetary policy

Monetary Policy Three primary tools are available to the Federal Reserve to change the money supply Reduce the reserve requirement during a serious recession. If banks are allowed to release more of their reserved funds for loans, the lowered interest rate will again entice consumers and firms to borrow funds to make purchases, increasing the aggregate demand. * Generally used only in a time of extreme recession

Bank Supervision Supervising Banks: Minimize risk in the banking system. Establish safe and sound banking practices Protect consumers in financial transactions

Financial Services Providing Financial Services: Serves as the “bankers bank” and fiscal agent for the U.S. Treasury. Currency and Coin Check Processing Electronic Payments

Other Responsibilities Circulate coin and currency Maintain the quality of money Detect counterfeit currency

New Currency

Take Away The role of the Federal Reserve System is to maintain public confidence in our nation’s financial system, essentially promoting maximum sustainable employment, stable prices, and steady growth To achieve this goal, the FRS implements monetary policy . . . a method used to increase or decrease the money supply in the economy, depending on the overall health of the economy

Federal Reserve System in Action September 11, 2001

QUESTIONS?