1. Federal Reserve System

2. Federal Reserve System
History
Structure
Roles & Responsibilities
The Fed in Action
Questions

3. Banking in the Early 1900s Financial disruptions
Loss of faith in the banking system
Bank panics & failures

4. Banking in the Early 1900s

5. Federal Reserve Act Signed into law in 1913
Created the Federal Reserve System
“Central Bank”
Independent within government

6. Our Nation’s Central Bank
Mission:
Promote the safety, soundness and stability of our nation’s financial system.
Mandate:
Promote maximum sustainable employment, stable prices and steady economic growth.

7. Structure of FRS Board of Governors 12 Regional Reserve Banks
7 Members (governors)
Chairman
12 Regional Reserve Banks
Federal Open Market Committee (FOMC)
7 Governors/5 Voting Presidents
8 times a year

9. Ben Bernanke

10. Board of Governors Fourteen Year Term Appointed by the President
Confirmed by the Senate
Ben S.
Bernanke
Donald L.
Kohn
Frederic S.
Mishkin
Susan B.
Bies
Vacant
Kevin M. Warsh
Randall S. Kroszner

11. Federal Reserve Banks

13. Roles of the Fed Conduct Monetary Policy Supervise Banks
Provide Financial Services

14. Monetary Policy
The process of managing money supply to achieve specific economic goals
Expansionary Policy
Increases business activity to grow economy
Goal: Reduce unemployment (avoid recession)
Contractionary Policy
Decreases business activity to slow economy
Goal: Curb inflation

15. Monetary Policy Economic Indicators Unemployment Housing starts
Consumer Price Index
Industrial production
Bankruptcies
Retail Sales
Stock Market prices

16. Monetary Policy
Three primary tools are available to the Federal Reserve to change the money supply
Buy (or sell) government bonds in the open market and give money to the banks. Banks then have more money available to loan and can reduce their interest rates. At lower rates, consumers are more willing to borrow, and aggregate demand can increase
* The buying a selling of government bonds is by far the most widely used tool of monetary policy.

17. Monetary Policy
Three primary tools are available to the Federal Reserve to change the money supply
Lower the short-term rate, the rate banks lend to one another overnight. When the Fed reduces the interest rate banks must pay to borrow from another bank, or the Fed, banks become more willing to borrow, to make money available for loans at lower interest rates. In this case, again, consumers are more willing to borrow and spend, increasing aggregate demand.
* Adjustments to the short-term rate is the most widely known tool, and is monitored closely by the public and used as a signal of the Fed’s intentions for monetary policy

18. Monetary Policy
Three primary tools are available to the Federal Reserve to change the money supply
Reduce the reserve requirement during a serious recession. If banks are allowed to release more of their reserved funds for loans, the lowered interest rate will again entice consumers and firms to borrow funds to make purchases, increasing the aggregate demand.
* Generally used only in a time of extreme recession

19. Bank Supervision
Supervising Banks: Minimize risk in the banking system.
Establish safe and sound banking practices
Protect consumers in financial transactions

20. Financial Services
Providing Financial Services: Serves as the “bankers bank” and fiscal agent for the U.S. Treasury.
Currency and Coin
Check Processing
Electronic Payments

21. Other Responsibilities
Circulate coin and currency
Maintain the quality of money
Detect counterfeit currency

22. New Currency

23. Take Away
The role of the Federal Reserve System is to maintain public confidence in our nation’s financial system, essentially promoting maximum sustainable employment, stable prices, and steady growth
To achieve this goal, the FRS implements monetary policy . . .
a method used to increase or decrease the money supply in the economy, depending on the overall health of the economy

24. Federal Reserve System in Action
September 11, 2001

25. QUESTIONS?