1. The Federal Reserve System
1913 signed into law
W. Wilson
Goal: more responsive money supply

2. The Fed 4 Main Parts Board of Governors Federal Open Market Committee
12 Federal Reserve banks
Member banks
MONETARY POLICY

4. Board of Governors Makes policy for nations banking system
Consists of 7 members appt’d by President and confirmed by Senate
14 year terms (1 is up every 2yrs)
Chairman & Vice named by Pres.
Decisions not subject to approval by govt to keep politics out

5. Federal Open Market Committee
7 members from Board of Governors +5 presidents of Fed Reserve Banks
Sets policy on purchase of securities which is part of Monetary Policy*
* discussed later

6. Federal Reserve Banks 12 banks each a separate district in US
Each is a corporation
Stocks only sold to member banks in district not public
9 member Board of Directors– bankers, industry members

8. Member Banks
All national banks are members of Federal Reserve and chartered by nat’l govt
State banks can decide to join or not
Must comply with federal laws and permit supervision
1980 deregulation law– makes little difference= all must follow Fed’s reserve requirements

9. 6 Major Functions of Fed Holding required reserves
Regulating supply of money
Clearing checks
Supplying economy with paper currency
Acting as fiscal agent for govt
Supervising member banks

10. Reserve Requirements A tool to regulate money supply
Amt of money banks must hold and not loan out
Raising Reserve Requirement:
--reduces the size of loans banks can make which reduces the money supply and can help stop inflation
Lowering Reserve Requirement
--increases the size of loans banks can make which adds to the money
supply and can combat recession

11. $$$$$
$$$

12. Regulating the supply of money
To combat the ups and downs of the business cycle
Can adjust the amount of money
in the economy (see previous slide)
MONETARY POLICY

13. Clearing Checks
The Fed deducts appropriate amount from buyers bank and deposits it in sellers bank
-no real money changes hands—entries in bank records are made

14. Paper Currency Federal Reserve notes are our paper bills
Issued by the 12 Fed Banks
Bank is indicated on seal on left side of front of bill
Created by US Treasury’s Bureau of Engraving and Printing in WA, DC but put in circulation by one of 12

16. Fiscal Agent of govt Works with US Treasury
Holds checking acct for govt
Ex– pensions, vets benefits, govt purchases

17. Supervising Member Banks
Ensures members comply with laws
Ensures members use sound banking practices
Ensures adequate capital, oversees mergers, and est. of branches, sets loan/investment limits
Shares this resp. with govt agency

19. *Back to Open Market Operations (Monetary Policy)
Another way the Fed can add or subtract money in the economy
The Fed itself can either buy or sell government bonds (securities)
Ex. #1—the Fed BUYS a bond from ‘you’—you deposit the money=more $ in economy
EX. #2—the Fed SELLS a bond to ‘you’—you withdraw $ from bank=less $ in economy

20. bond $
FED
Bank $$
$$$ $$
FED
Bank
bond

21. Manipulating Interest Rates (Monetary Policy, too)
Banks sometimes need more cash than they have in reserve thus they can borrow $ just like ‘you’
The Fed loans $ to banks
Banks must pay an interest rate on the borrowed money (just like ‘you’)
Called the Discount Rate
By raising or lowering the % the Fed can influence the amt $ in economy

22. Discount Rate
Raising the rate signals ‘tight money’—attempt to reduce amt of money in economy
Lowering the rate signals ‘easy-money’—attempt to add amt of money to economy
3% 5% 6% 7% 8% 9% 10%

23. FED 3% $
Bank 5%
Too expensive
FED 5%
Bank 7%

24. Summary Adding Money in the economy fights recession
Subtracting money from economy fights inflation
Purpose: to prevent business cycle from being too ‘bumpy’ (boat on waves analogy)

25. THE END