Banks and Banking October 18, 2011 – Mr. Graboski Aim: What is the Federal Reserve System and what are its functions? Do Now: Write down one question you have regarding the article you read over the weekend?

Federal Reserve System 7 member board of governors and a chairman. Divided into 12 districts. Each district has its own Federal Reserve Bank. The Board of Governors is responsible for the overall direction of monetary policy and for supervising the banking system.

Federal Reserve Districts

FOMC Federal Open Market Committee – Made up of the seven member Board of Governors, as well 5 of the 12 Federal Reserve Bank presidents. The FOMC holds eight scheduled meetings each year to examine a wide range of economic indicators.

Federal Reserve System Profit is not one of the goals of the Federal Reserve: There are four main functions:

Federal Reserve Holding Reserves: The Federal Reserve Bank will hold a portion of the money from private banks in an account set up at the Fed. The Federal Reserve Banks serves as a bank for banks. What do you think some of the other three functions might be?

Federal Reserve - Functions Providing cash and loans: When a bank needs its cash to meet withdrawal demands, the Fed supplies it. The Fed also lends money to banks if they are running short on funds.

Federal Reserve Functions Clearing Checks: Write a check to a store, the store deposits the check into their own bank. The Fed takes care of transferring the funds from your bank to the store’s bank. This process is known as check clearing.

Federal Reserve Functions Linking banks electronically: The Federal Reserve and nearly every commercial bank in the nation are linked electronically. This allows banks to quickly transfer funds from one financial institution to another.

Easy Money vs. Tight Money Policy Fed policy can either be expansionary or contractionary.

Easy Money Policy - Expansionary Encourages economic growth and lower the unemployment rate. The Fed does this by accelerating the growth of the money supply. Interest Rates -

Tight Money Policy -Contractionary Encourages slow economic growth and decreases the inflation rate. The Fed does the by slowing the growth of the money supply.

Tools of the Federal Reserve The Federal Reserve can speed or slow money creation by making it easier or harder for banks to make loans. This affects the money supply. There are three ways the Fed affects the supply of money. Handout (3 Tools – Open Market Operations, Required Reserved Ratio, Discount Rate)

Investing Backed up by the “full faith and credit” of the United States government, these securities are among the safest investments in terms of default risk. This includes treasury bonds, t-bills and t- notes.

Investing Treasury Bonds – 10 to 30 years. Safe. Interest is paid annually. Treasury Notes – 2 to 10 years. Safe. Interest is paid annually. Treasury Bills – 3,6, or 12 months. Liquid and Safe. Interest only at maturity. The minimum purchase for each is $1,000 for each. The demomination for each is $1,000 as well.

Government Savings Bonds Low Denomination ($50 to 5,000) Helps pay for roads, bridges, etc. The government pays interest on the bond, but at first you don’t pay full price for the bond. You can buy a $50 savings bond for $25.

Corporate Bonds Why do corporate bonds have a higher level of risk than treasury bonds? What does a corporation have to do to ensure that you have a successful investment?

Corporate Bonds Corporate bonds have moderate levels of risk because investors must depend on the success of the corporation’s sales of goods and services. The sales the corporation completes must be able to generate enough income to pay interest and principal.