The United States Federal Reserve By Dr. Paul Lockard Professor Black Hawk College

The United States Federal Reserve The structure of the Federal Reserve The policy tools of the Federal Reserve The functions, both formal and informal, of the Federal Reserve

The Structure of the Federal Reserve

Seven member Board of Governors runs the Federal Reserve 12 Federal Reserve regions The Federal Open Market Committee, which determines the nation’s monetary policy. Thousands of member banks

The Structure of the Federal Reserve The terms of the members of the Board of Governors are staggered, to prevent any single President or Congress from picking all of them at once. The twelve Federal Reserve Districts each have their own bank. We are in District #7, headquarters in Chicago.

The Structure of the Federal Reserve The Federal Reserve Banks are owned by the member banks of that district. THIS MEANS THAT THE FEDERAL RESERVE IS ULTIMATELY RESPONSIBLE TO BANK OWNERS, NOT TO THE AMERICAN PEOPLE.

The Policy Tools of the Federal Reserve

The Fed has a large number of regulatory tools, which apply to commercial banks. The Fed can change the reserve ratio of banks. The Fed can change the discount rate it charges banks. The Fed has the ability to buy and sell Treasury bonds to shape money supply.

Functions of the Federal Reserve

Clear checks Issue new currency Withdraw damaged currency Collect data and analyze the economy Acts as fiscal agent to the US government

Functions of the Federal Reserve Monitor and examine member banks Hold reserves of member banks Establish required reserve ratios Establish the discount rate and determine which banks are eligible for them

Functions of the Federal Reserve Through open market operations, attempt to control the rate of inflation Through open market operations, influence the labor market

Clear Checks Most checks drawn on banks are sent through the Federal Reserve. Most electronic checking is also routed through the Federal Reserve.

Currency The Federal Reserve is responsible for the even distribution of cash of all types throughout the country. Ships coins and paper bills all over the country. Is responsible for removing damaged paper bills.

Analysis and Data Collection The Federal Reserve collects, analyzes, and publishes a very large amount of economic data.

Acts as a Fiscal Agent The Federal Reserve holds the US governments stockpile of Treasury notes. The Federal Reserve physically handles many of the checks that go to or from the US government.

Examines Member Banks The Federal Reserve watches over member banks to detect which banks are in trouble. If the Federal Reserve believes a bank is having problems, it can closely examine that bank. They can call in other government agencies as well.

Reduces the Level of Inflation The Federal Reserve has also become the country’s foremost inflation fighter, even though this is not in the original charter

Keeps Loose Labor Markets The Federal Reserve has also taken up the task of keeping labor markets loose, or a less than full employment economy.

The Current Credit Crisis By Dr. Paul Lockard Professor Black Hawk College

Background: Old Style Mortgages Traditionally, from the 1930’s to the 1980’s, banks lent money for mortgages in a simple fashion. Home mortgage loans were for a fixed time and a fixed rate: 15 to 30 years.