The Federal Reserve System Chapter 20

The Federal Reserve or “The Fed” is the nation’s central bank. It was created in 1913 in attempt to end periodic financial panics.

The Fed’s responsibilities: Regulate the nation’s money supply Supervise Banks Clear Checks

Who are the customers of the Fed? Commercial Banks (like Bank of America, Regions Bank, and The Bank of Edwardsville) The Government (The Fed holds the accounts of the U.S. Government) We (as individuals) can not bank at the Fed.

Most nations have a central bank. U.S.A. - the Federal Reserve Bank England - The Bank of England Japan - Bank of Japan Canada - Bank of Canada

In addition to overseeing banking, The Federal Reserve also implements monetary policy in effort to stabilize economic activity.

Monetary Policy A banking policy that affects the supply of money in circulation which affects the amount of credit and business activity in the economy.

The goal of the Fed: To ensure enough money and credit are available to allow expansion of the economy without allowing rapid inflation. The Fed. wants to strike a balance between tight and loose money policies.

Loose Money Policy A lot of money is available at low interest rates. Inexpensive and easily available credit. The economy expands.

Tight Money Policy Relatively little money to lend at high interest rates. Makes credit expensive and in short supply.

Would you have a “tight” or “loose” monetary policies during a time of inflation? Tight - to decrease the money in the economy Look at figure 20-1 in your book (pg. 333)

Organization of the Fed. 12 districts - each has its own Federal Reserve Bank, A Board of Governors, and about 5000 member banks. (The Federal Reserve Bank of St. Louis is one of the 12.) There are also 25 Federal Reserve Branch Banks. These branches aid the district banks in carrying out their responsibilities. See page 334, figure 20-2

More info: The President of the USA chooses the 7 member Board of the Federal Reserve. The term of a Board member is 14 years. The current chairperson of the Federal Reserve is Ben Bernanke. The past chairman you may be familiar with is Alan Greenspan. Each board member has one vote.

True or False? The Chairperson of the Board of Governors of the Federal Reserve is considered one of the most important and powerful positions in government? TRUE!!!

True or False? All banks are required to become members of the Federal Reserve System? No, just national banks - but state banks can also belong. You become a member by purchasing stock.

True or False? All institutions that accept deposits must deposit its reserves in its district Federal Reserve Bank? TRUE

Six Functions of the Fed. Act as the governments banker Act as a consumer protector Regulate the money supply Supervise Banks Clear Checks Supply paper currency