The Federal Reserve System Chapter 15

Goals & Objectives 1.Structure of the Federal Reserve. 2.Regulatory responsibilities of the Fed. 3.Fractional Reserves. 4.Monetary tools of the Fed. 5.Monetary policy and interest rates. 6.Monetary policy and inflation. 7.Monetary policy and politics.

Creation of the FED  1913?  Economic Changes : 1.Federal Trade Commission -regulates all trade commerce th amendment – income taxes are indirect taxes 3. Federal Reserve – Private Central Banking System 4.Revenue Act of 1913: Underwood Tariff reinstated.

Structure of the Federal Reserve 1. Private Ownership – A private Bank. Operated by bank members in the stock market, or nationally chartered banks. 1. Private Ownership – A private Bank. Operated by bank members in the stock market, or nationally chartered banks. a. State Banks are not required to join. a. State Banks are not required to join. 2. Member Banks are required to purchase shares of the Federal Reserve stock. 2. Member Banks are required to purchase shares of the Federal Reserve stock.

Regulatory Responsibilities 1. Regulates the Supply of Money by establishing Reserve Requirements on all banking institutions. 2. Bank Holding Companies-Stock owned banks (no deposits or loans). 3. International Operations: 20% of banking in the U.S. 4. Member Bank Mergers:

Fed Responsibilities 1. Check clearing. 2. Currency maintenance. 3. Coin maintenance. 4. Financial Services to the gov’t. 5. Regulation Z: Federal Truth in Lending Act; disclosure of contract details to borrowers. 6. IRS account of individual & business taxes.

Monetary Policy Monetary Policy: expansion or contraction of the money supply to effect the availability of credit Monetary Policy: expansion or contraction of the money supply to effect the availability of credit 1. Reserve Requirement: 1. Fractional reserve: deposit requirements. 2. Legal Reserves: coins & currency in vaults. 3. Excess reserves: lending to borrowers.

Fed & Monetary Policy

How Banks Operate 1. Liabilities: 1. Liabilities: 2. Assets: 2. Assets: 3. Balance sheet: 3. Balance sheet: 4. Net Worth: 4. Net Worth: BMW-liability or asset? BMW-liability or asset? 2. Home-asset or liability? 2. Home-asset or liability? 3. Owe vs. Own 3. Owe vs. Own 4. Upside down or liquid 4. Upside down or liquid

Credit (Debt) vs. Wages

Balance Sheet 1. New Car $30, New Car $30, Home owe $250, Home owe $250, Credit Cards $15, Credit Cards $15,000 Liabilities: $295,000 Liabilities: $295,000 Net Worth: -$7,000 in the Red not credit worthy Net Worth: -$7,000 in the Red not credit worthy 1. Car Worth: $18, Car Worth: $18, HomeValue $265, HomeValue $265, Checking $5, Checking $5,000 Assets: $288,000 Assets: $288,000

Devaluation & Tight Money Policy

Liquidity The potential to convert assets into cash quickly: House? Car? Stocks, Bonds, Mutual Funds IRA’s, Whole Life Insurance

Tools of Monetary Policy 1. Easy Money Policy: Quantitative Easing, low interest rates, print more money 2. Tight Money Policy: restricts supply of money, increases interest rates. Discount rate: 3 rd tool of monetary policy

Easy Money Policy & Fed

Tools of Monetary Policy 1.Reserve Requirement: 2.Open Market Operations: 1.Buying of gov’t securities increases money supply 2.Selling of gov’t securities decreases money supply 3.Discount Rate: interest charged to lending institutions.

Tools of Monetary Policy 4. Margin Requirements: minimum deposits to buy securities. 5. Moral suasion: Federal Reserve press releases on market health. 6. Selective Credit Controls: credit rules on loans.

Monetary Policy, Banking & the Economy 1. Short Run Impact: 1. Prime Rate: 1.The Politics of Interest Rates: 2. Long-Run Impact: 1.Monetizing the debt: increase money supply to keep interest rates low. 1.Loose Monetary Policy and Inflation.