1. The Federal Reserve System and Monetary Policy
Chapter 16

2. Chapter 16.1
Structure of the Fed

3. Federal Open Market Committee (FOMC)
Board of Governors
Composition
7 members appointed by the POTUS to 14 yr. terms.
Supervises and regulates the Fed.
Advisory Councils
Federal Advisory Council
Consumer Advisory Council
Thrift Institution Council
Federal Open Market Committee (FOMC)
The Board of Governors
NY District Bank President
5 Presidents of District Banks
Decides Monetary Policy
12 District Banks
Contribute Funds
Member Banks
Receive Stock

4. Found this one on the Internet

5. District Banks

6. Responsibilities of the Fed
1. Maintaining the Currency
Federal Reserve Notes (paper money) printed by the U.S. Bureau of Engraving and Printing and stored in Fed’s district bank until needed
Bureau of the Mint makes the coins – also stored till needed
Banks trade in damaged money for new stuff – The Fed destroys the old money.
Fun Facts about Money (You had to be in class to get these – there will be 4 extra credit about this on the test.)

7. 2. Maintaining the Payment System
Electronic transfers, checks, debit cards, internet banking – all the ways payments are made from banks to individuals or businesses. The Fed makes sure it is working smoothly.

8. 3. Regulating and Supervising Banks – The Fed makes sure all
3. Regulating and Supervising Banks – The Fed makes sure all banks follow banking laws. Includes supervising:
US banks in foreign countries
US branches of foreign banks
Bank Holding Companies (firms that own and control one or more banks)
Bank of America Corp
JP Morgan Chase
American Express
Goldman Sachs

9. 4. Financial Literacy and Consumer Protection
Truth in Lending Act says anyone who loans funds to consumers must follow certain rules. So that Forever 21 credit card is regulated by the Fed
Regulation Z gives The Fed the authority to require all businesses that issue credit follow the truth in lending requirements.

10. 5. The Fed is the governments bank
When you write a check to pay taxes – it goes to The Fed
When you get a SS check from the government – it comes from The Fed

11. Chapter 16.2
Monetary Policy

12. Fractional Reserve System
The amount of money that the bank must keep on hand either
In it’s own vault
Or at the Fed
This is called the legal reserve
The size or amount of the legal reserves is set by the Fed and called the reserve requirement

13. Banking with Fractional Reserves
Molly deposits $ in her bank.
The Fed’s reserve requirement is 20% (called the member bank reserve or MBR)
The bank can loan out how much of Molly’s money?
Max comes to the bank and wants to borrow $
He gets the loan and deposits it into his checking account.
How much of the $ can Max’s bank loan out?
Xander comes in for a loan for $ and deposits it as his bank
How much can Xander’s bank loan out? $ $ $

14. Isn’t that just all the same money being moved around? Kind of….
The total amount of money in the public’s hands is the $ that Molly deposited
Plus the $ that Max deposited
Plus the $ that Xander deposited.
How much is actually in reserve?
$ at Molly’s bank
$ at Max’s bank
$ at Xander’s bank (They can loan out the $ whenever they want.)

15. Is there a limit to all this expansion of money?
There’s an equation (shocking)
Total Deposited $ = =
$10,000.00
Reserve Requirement
0.2

16. What happens if one of those people don’t deposit the money borrowed?
Only money that is put into the bank can grow. So if Max borrowed $ and went and paid that money to his builder – that money would not be available to the bank to loan out.
However, if the builder deposited the money….

17. Monetary Policy
Changes in the money supply that affect the availability and cost of credit.
Based on supply and demand
More money will be demanded when interest rates are low
Interest rates – the price of credit to a borrower
So when the Fed conducts monetary policy and changes the supply of money, it changes interest rates.

18. Easy vs Tight Money Supply
Easy Money Policy – Fed Expands the money supply causing interest rates to fall
How does this stimulate the economy?
Tight Money Policy – the Fed restricts the size of money supply.
How does this slow the growth of the economy?

19. 3 Major Tools to Conduct Monetary Policy
1. Reserve Requirements – Within limits that Congress sets, the Fed can change this requirement for all checking, time and savings account.
2. Open Market Operations – The buying and selling of government securities in financial markets. FOMC conducts open-market operations.
3. Discount Rate- The interest that Fed charges on loans to other financial institutions.

20. Reserve Requirements – If the Fed raises or lowers the RR, it changes the money supply
Total Deposited $ = =
$10,000.00
Reserve Requirement
0.2
Total Deposited $ = =
$20,000.00
Reserve Requirement
0.1
The Fed doesn’t like this tool – so it doesn’t use it very much.

21. Open Market Operations –
If the Fed buys securities – it is buying more money or bringing more into the banking system. With more money in the banking system – the money supply drops.
Total Deposited $
$10,000.00 = =
Reserve Requirement
0.2
Total Deposited $ = =
$15,000.00
Reserve Requirement
0.2

22. Open Market Operations –
If the Fed sells securities – it is selling it’s money. With LESS money in the banking system – the money supply goes down.
Total Deposited $
$10,000.00 = =
Reserve Requirement
0.2
Total Deposited $ = =
$5,000.00
Reserve Requirement
0.2

23. Discount Rate- The interest that Fed charges on loans to other financial institutions
When you hear “The Fed is raising INTEREST RATES – what that really means is they are raising the rate they charge to banks or the Discount Rate (DR).
If the DR goes up – so does the Prime Rate (PR)
If the PR goes up – Mortgage Rates
go up
Mortgages are the cheapest rates a
bank gives it’s customers so if MR is up
All credit rates go up for everything DR PR MR CR

24. Summary of Monetary Policy
Tool
Fed Action
Effect on Excess Reserves
Money Supply
1. Reserve
Requirement
Lower
Frees excess reserves because fewer are needed to back existing deposits
Expand
Raise
More reserves are required to back existing deposits. Excess reserves contract
Contracts
2. Open Market Operations
Buy Securities
Checks written by buyers add to reserves in the banking system.
Expands
Sell Securities
Checks written by buyers are subtracted from bank reserves. Excess reserves in the system contract.
3. Discount Rate
Additional reserves can be obtained at lower cost. Excess reserves expand.
Additional reserves through borrowing are now more expensive. Excess reserves are not added.

25. Monetarism
Because the Fed cannot be sure when or if their monetary policy will have an impact – some think we should apply the idea of monetarism.
Monetarists believe the money supply can be a destabilizing element that leads to unemployment and inflation. They favor policies that allow the money supply to grow slowly and consistently.
This policy is neither demand or supply side and only addresses the money supply.

26. Quantity Theory of Money
Basically – if you allow money to grow too much, too fast – all the prices on all the things goes UPPPPP!
This can also cause the wage-price spiral
So why doesn’t the government just force businesses to keep prices stable?
Nixon tried and failed.

27. Chapter 16.3
Economics and Politics

28. Getting going after 2008
Recovery took components of demand, supply and monetarism policies to get us out of the Great Recession
Fiscal policy has too many lags to work today (lead, legislative and implementation lags)
Gridlock makes is hard for fiscal policy to even happen
Ideological gap – the widening of it makes compromise unlikely
This has caused a rise in the use of monetary policy over fiscal policy. The Fed can act immediately while Congress, well…..

29. Supply Side Policies – why we like them
Lower taxes
Smaller government
I mean…
Remember – it is designed to spur growth – not fix an unstable economy

30. What did we actually do to get out of the GR
Monetary Policy – VERY LOW interest rates
QE (Quantitative easing)– a new tool – the Fed actually bought out the riskiest investments from the banks to give banks the incentive to loan money again.
Fiscal Policies
TARP – the government bought out bad loans and investments
ARRA – bailouts to non-banks (Chrysler, GM, AIG) Had to be paid back
Passive Fiscal Policy – The automatic stabilizers kicked in. Unemployment insurance and for those near retirement, SS

31. Economists differ…
On what the problem is – not on what to do about it.
Their own life experiences influence the policies they favor
The problems of the current era also influence them
Overall – we are better educated about economics because economists have been successful in explaining economic activity to the public and getting the public to care about it.
Part of this education comes from the president’s CEA (Council of Economic Advisors). They advise the POTUS.