1. The Federal Reserve and
Monetary Policy

2. Government role with economy
One way the government tries to promote (influence) economic growth and stability is by controlling the money supply, usually through interest rates.
This is known as
Monetary Policy

3. the FED (Federal Reserve System)
The need for a Central Bank:
Bank failures (1907) resulted in Congress passing the Federal Reserve Act (1913).
This act created 12 independent regional banks that could lend to other banks in time of need.

4. the FED (Federal Reserve System)
(Federal Reserve Bank of Dallas, 2006)

5. the FED (Federal Reserve System)
Each District operates independently
All private banks in the district
(Comerica, 5/3, Huntington,
The Little Bank
of Cooperville, etc.)
report to the Federal
Reserve Bank in Chicago
(Chicago federal reserve image, n.d.)
All twelve (12) districts meet with seven (7) Board of Governors in Washington, DC to determine Federal Monetary Policy

6. the FED (Federal Reserve System)
What does the FED do?
Keeps Banks Safe (supervision and regulation)
Makes Payments Secure (protects cash flow)
Stabilizes the Economy (monetary policy)

7. KEEPS BANKS SAFE SURPRISE VISITS !!
Visits Local Banks and reviews records
Make sure banks are following regulations
Checks Loans
Fair lending practices to all who ask for loans
Loans are prudent (not too risky)

8. the FED (Federal Reserve System)
What does the FED do?
Keeps Banks Safe (supervision and regulation)
Makes Payments Secure (protects cash flow)
Stabilizes the Economy (monetary policy)

9. MAKES PAYMENTS SECURE Protect cash flow (customer’s money)
Check Clearing House
ALL checks are sent to the FED for review
Make sure money gets to different bank accounts
This includes electronic payments/direct deposits

10. CHECK CLEARING Mr. Jones deposits a check from
Mr. Harris into his bank
“Yes !”
“Does Mr. Harris have money in his account
to cover the check?”
(Shutterstock, n.d.)

11. MAKES PAYMENTS SECURE Protects cash flow (customer’s money)
Banks and FED Hold a Reserve of Money
Individual Banks are required to send excess money to Fed (they will get paid interest by FED)
When banks need more money they call the FED
(prevents bank failures)

12. the FED (Federal Reserve System)
What does the FED do?
Keeps Banks Safe (supervision and regulation)
Makes Payments Secure (protects cash flow)
Stabilize the Economy (monetary policy)

13. STABILIZE THE ECONOMY
The Federal Reserve will try to stabilize the economy by preventing recessions and fighting inflation
by Changing Reserve Requirements
through Open Market Operations
by Setting Interest Rates

14. STABILIZE THE ECONOMY
1) Change Reserve Requirements (how much a bank can keep on hand)
More money being lent, means More money out in circulation.
INCREASED GROWTH or
INFLATION GOES UP
Less money being lent, means less money out in circulation.
SLOWER GROWTH or
INFLATION GOES DOWN

15. STABILIZE THE ECONOMY 2) Open Market Operations
The most common strategy used by the FED
The Federal Reserve will buy and sell government securities (bonds)
This either puts money into circulation or takes money out of circulation

16. OPEN MARKET OPERATIONS
(Shutterstock, n.d.)
1. The FED buys bonds from a broker or lending institution
2. The broker gets money from the FED
3. Broker deposits money in the bank
4. Banks have more money to lend in the open market
5. More money in circulation stimulates economic growth or increases inflation

17. OPEN MARKET OPERATIONS
(Shutterstock, n.d.)
1. The FED sells bonds to a broker or lending institution
2. The broker pays money to the FED
3. Broker’s check/cash is withdrawn from the bank
4. Banks have less money to lend in the open market
5. Less money in circulation slows economic growth or decreases inflation

18. STABILIZE THE ECONOMY 3) Set Interest Rates
Discount Rate: Interest rate set by the FED that is charged to other banks for borrowing
Prime Rate: Interest rate that other banks charge their best customers for borrowing (typically short term loans yrs)
Mortgage rates are different (long term 15-30)

19. SETTING INTEREST RATES
The FED will raise or lower the Discount Rate to impact the money supply
It will raise interest rates to slow growth or decrease inflation
It will lower rates to grow the economy or increase inflation

20. SETTING INTEREST RATES
The current Discount Rate is 0.75% (.0075)
The current Prime Rate is 3.25% (.0325)
What if the FED lowers the Discount Rate?
0.50%
3.00%
MORE MONEY IN CIRCULATION =
GROWTH OR HIGHER INFLATION
Discount
Rate
Prime
Rate
SOURCE:
shutterstock
It will be more appealing for people (companies) to take out loans

21. SETTING INTEREST RATES
The current Discount Rate is 0.75% (.0075)
The current Prime Rate is 3.25% (.0325)
What if the FED raises the Discount Rate?
1.00%
4.00%
LESS MONEY IN CIRCULATION =
SLOWS GROWTH OR LOWERS INFLATION
Discount
Rate
Prime
Rate
SOURCE: shutterstock
shutterstock
It will be less appealing for people (companies) to take out loans

22. FEDERAL RESERVE BOARD Chairman – Ben Bernake
CEO District 7 – Charles Evans
Chairman – Ben Bernake
(Oliner, 2012)
Reuters