Federal Reserve System Benjamin Bernanke Former Chair Former Chair Janet Yellen Current Chair Current Chair

Federal Reserve System The central bank and monetary authority of the United States; known as “ the FED ”. A central bank is the government agency that oversees the banking system and is responsible for the amount of money and credit in the economy. From St. Louis Fed

The Fed ’ s Objectives “ Stable prices ” “ Maximum employment ” Moderate long-term interest rates From St. Louis Fed

Decision makers at the Federal Reserve The Board of Governors FOMC Federal Open Market Committee

THE FEDERAL RESERVE AND THE BANKING SYSTEM THE FEDERAL RESERVE AND THE BANKING SYSTEM Board of Governors Governors 12 Federal Reserve Banks 12 Federal Reserve Banks CommercialBanksCommercialBanks Thrift Institutions (Savings & loan associations, mutual savings banks, credit unions) Thrift Institutions (Savings & loan associations, mutual savings banks, credit unions) The Public (Households and businesses) The Public (Households and businesses) Federal Open Market Committee

From St. Louis Fed

Who owns the Fed? Each of the 12 district Federal Reserve banks is owned by its member banks

The 12 Federal Reserve Banks

1.To regulate bank holding companies and state chartered banks. 2.To supply money and credit to the economy to maintain stable prices and full employment. 3.To ensure the smooth functioning of the payments system. 4. To act as the government ’ s bank. From St. Louis Fed

What are the responsibilities of the Fed? Influence our money supplyInfluence our money supply Issue and maintain our currencyIssue and maintain our currency Act as a clearing house for checksAct as a clearing house for checks Serve as a bank for the federal governmentServe as a bank for the federal government Serve as a “ bankers bank ”Serve as a “ bankers bank ” Act as a “ lender of last resort ” to member banksAct as a “ lender of last resort ” to member banks

Does the FED loan money to private companies and individuals ? No, they only do business with financial institutions They are the bankers ’ bank!

How does the Fed influence the money supply? Discount rateDiscount rate Open Market Operations (Federal Funds Rate)Open Market Operations (Federal Funds Rate) Reserve requirementsReserve requirements

What is the Discount Rate? The interest rate that banks are charged when they borrow money from the Fed

Banks have creditable customers, but no excess reserves. Why would the member banks borrow from FED at the discount rate?

Banks tend to borrow more from the Fed, increasing the growth of the money supplyBanks tend to borrow more from the Fed, increasing the growth of the money supply What happens when the FED lowers the discount rate? MS i% I n C AD PL RGDP

Banks tend to borrow less from the Fed, slowing the growth of the money supplyBanks tend to borrow less from the Fed, slowing the growth of the money supply What happens when the FED raises the discount rate? MS i% I n C AD PL RGDP

Which monetary tool is most often used? Open Market Operations OMO(FOMC)

Purchases and sales of government securities by the Federal Reserve in an effort to influence the money supply.

What is the role of the Federal Open Market Committee? The FOMC makes decisions about changing interest rates which they can do by the buying and selling of government securities.

What happens when the FED purchases government securities? The money supply expandsThe money supply expands Interest Rate dropsInterest Rate drops New investment and consumer spendingNew investment and consumer spending AD increasesAD increases Price level and RGDP increasePrice level and RGDP increase The money supply expandsThe money supply expands Interest Rate dropsInterest Rate drops New investment and consumer spendingNew investment and consumer spending AD increasesAD increases Price level and RGDP increasePrice level and RGDP increase MS i% I n C AD PL RGDP

What happens when the FED sells government securities? The money supply contactsThe money supply contacts Interest Rate risesInterest Rate rises Investment and Consumer spending declinesInvestment and Consumer spending declines AD decreasesAD decreases Price level and RGDP decreasePrice level and RGDP decrease The money supply contactsThe money supply contacts Interest Rate risesInterest Rate rises Investment and Consumer spending declinesInvestment and Consumer spending declines AD decreasesAD decreases Price level and RGDP decreasePrice level and RGDP decrease MS i% I n C AD PL RGDP

What is the Federal Funds Rate? The interest rate that one bank will charge another bank to borrow money overnight to cover its reserve requirement.

If the FED buys bonds, the federal funds rate…? Banks have more reserves, so the Federal Funds rate falls

If the FED sells bonds, the federal funds rate…? Banks have fewer reserves, so the Federal Funds rate rises

What happens when the Fed, changes in reserve requirements Lower reserve ratio raises the money multiplier, thus expanding the money supply Higher reserve ratio lowers the money multiplier, thus slowing the growth of the money supply

What is the Prime Interest Rate? The interest rate that big banks charge their best and most credit worthy customers.

Interest Rates Federal Funds Rate Prime Interest Rate Business Loan Rate Mortgage Rate Auto Rate(new and used) Personal Loans The FOMC targets the Federal Funds Rate which sets rates for the following: