1. Chapter 15 The Federal Reserve System & Monetary Policy
Section 1 Organization & Function of the Federal Reserve System
Section 2 Money Supply & the Economy
Section 3 Regulating the Money Supply

2. Organization & Functions of the Fed
Created in 1913 as a central banking organization to end panics and recessions.
Fed – Federal Reserve System
Fed is responsible for monetary policy
Monetary Policy – policy that involves changing the rate of growth of the supply of money in circulation in order to affect the cost and availability of credit

3. Organization & Functions of the Fed
Board of Governors – directs the operation of the Fed
7 members appointed by the President with Senate approval for 14 years
Alan Greenspan & Ben Bernanke – serve(d) as chairperson
12 District Banks
25 Branch Banks
Member Banks

4. Organization & Functions of the Fed
Federal Advisory Council – reports to the board of governors on general business conditions in the country
Federal Open Market Committee – determines whether or not to change interest rates which impacts the financial world

5. Organization & Functions of the Fed
12 Federal Reserve districts with a bank (page 402)
Set up as a corporation owned by member banks with a 9 member board of directors
Services are available to all banks
Decides truth-in-lending rules to protect consumers

6. Functions of the Federal Reserve
Clearing Checks – see figure 15.3
Government’s Fiscal Agent – tracks govt. deposits, checking account for the Treasury, & advises federal government
Supervises Member Banks – regulates state banks

7. Functions of the Federal Reserve
Holding Reserves & Setting Reserve Requirements – controls money in circulation by setting % required for reserves
Supplying Paper Currency – all paper money printed in D.C. by Bureau of Engraving & Printing to replace old money & meet demand
Regulating the Money Supply – primary responsibility which affects the amount of credit & business activity

8. Money Supply & the Economy
Fed’s most important function involves controlling the rate of growth of the money supply
Loose money policy – monetary policy that makes credit inexpensive and abundant, possibly leading to inflation
Tight money policy – monetary policy that makes credit expensive and in short supply in an effort to slow the economy

9. Money Supply & the Economy
Loose Money Supply
Borrowing is easy
Consumers buy more
Businesses expand
More people are employed
People spend more
Inflation results

10. Money Supply & the Economy
Tight Money Supply
Borrowing is difficult
Consumers buy less
Businesses postpone expansion
Unemployment increases
Production is reduced

11. Money Supply & the Economy
Fractional reserve banking – system in which only a fraction of the deposits in a bank is kept on hand, or in reserve; the remainder is available to lend
Reserve requirements – regulations set by the Fed requiring banks to keep a certain percentage of their deposits as cash in their own vaults or as deposits in their Federal Reserve district bank

12. Money Supply & the Economy
Expanding the money supply – see15.6 on page 409

13. Regulating the Money Supply
The main goal of the Federal reserve is to keep the money supply growing steadily and the economy running smoothly without inflation.

14. Changing Reserve Requirements
Control money supply through reserve requirements.
Lower the % of deposits kept in reserve, the more $s available to loan
Higher the % of deposits, the more $s available to loan
Raising reserve requirements slows down the economy.
Changing the reserve requirement is rarely used.

15. Changing the Discount Rate
Banks my need to borrow money to meet their reserve requirements.
Discount rate is the interest rate the Fed charges for loans to banks.
Prime rate is the interest rate banks charge their best customers.
Increase in these rates lowers the money supply and vice versa.
Typically the Fed does not use the discount rate to regulate the economy.

16. Federal Funds Rate
Federal funds rate is the interest rate that banks charge each other on loans (usually overnight).
The federal funds market is active with billions of dollars exchanged each day.
The lower the rate the more banks will borrow and business activity increases.
The higher the rate the less will be borrowed and business activity decreases.

17. Open-Market Operations
Open-market operations – buying and selling U.S. securities by the Fed to affect the money supply.
When the Fed buys securities, money supply increases.
Selling securities lowers reserves and money supply decreases.

18. Difficulties of Monetary Supply
Keeping track of the money supply is difficult in trying to gauge the economy.
Credit cards and electronic banking make tracking money supply difficult.
Fed is criticized for decisions that may lead to inflation or recession.
Fed receives conflicting advice from many directions.
Other factors, such as federal taxing & spending also greatly affect the economy.